SOFTWARE AS A TOOL OF COMPETITIVE ADVANTAGE:
INTERNATIONAL RETAIL BANKING
1
Introduction: Objectives of this Benchmarking Study……………………………………2
2
Approach: Methodology and Questions…………………………………………………..9
3
Introduction to Case………………………………………………………………………10
4
The Industry Context: Global Financial Services and the Retail Consumer……………...12
5
Organization, E-Citi and Citi’s Global Consumer Strategy
Product Market Segmentation, Cross-selling and International Leverage…………....24
Mobile Phone Basis Citi’s Future Global Retail Banking Strategy…………………..30
Products, Service Support and IT Selection Strategies……………………………….34
6
Japan, A Microcosm – Synergies, Affiliations and Reach ……………………………….36
7
Trust Bank, Complementary Services, and Interactive Strategic Benefits……………….55
8
Summary - Owning the Future of International Retail Banking……………………….…57
Appendix I - Summary Answers to Questions for Citigroup - IRB Strategy & Operations….65
Appendix II - Some Firm and Market Data
Tables 1-6…………………………………………………………………………......73
Highlights from Citi’s Assessment of Global Consumer Business 1999 and 1998…..83
Bibliography and References………………………………………………………………….89
Introduction: Objectives of this Benchmarking Study
This international retail banking study for Citigroup (CG)1 was completed under a
three-year research grant from the Sloan Foundation. The project’s overall purpose has
been to examine in a series of case studies how U.S. and Japanese firms who are recognized
leaders in using information technology (IT)2 to achieve long-term sustainable advantage
have organized and managed this process. While each case is complete in itself, each is part
of this larger study.3
This case for a large international bank with extensive global retail banking and financial
services capabilities together with other cases support an initial research hypothesis that leading
U.S. and Japan software users are very sophisticated in the ways they have integrated software
into their business strategies. They use IT to institutionalize organizational strengths and capture
tacit knowledge on an iterative basis. While Japanese users have relied heavily on customized
and semi-customized software (Rapp 1995, 1998 and 1999), this is gradually changing towards
1
Citigroup “is a diversified holding company whose businesses provide a broad range of financial services to consumer and
corporate customers around the world. The Company’s activities are conducted through Global Consumer, Global Corporate and
Investment Bank, Asset Management, and Investment Activities” (Citigroup 2000).
2
In this paper and the study, software, information technology (IT) and systems are used interchangeably. In addition, when
referring to the firm as a whole, the text uses “it”, but when referring to management, “they” is used.
3
There is no precisely comparable Japanese international retail banking case, especially given the uniqueness of CG’s franchise.
However, a case was completed for Sanwa Bank on its Japanese retail banking IT strategy (Rapp 1999c). The industries and
firms examined in this project are food retailing (Ito-Yokado), semiconductors (NEC and AMD), pharmaceuticals (Takeda and
Merck), retail banking (Sanwa and Citibank), investment banking (Nomura and Credit Suisse First Boston), life insurance (Meiji
and Nationwide), autos (Toyota), steel (integrated mills and mini-mills, Nippon Steel, Tokyo Steel and Nucor), and apparel
retailing (Isetan and Federated). Nationwide replaced USAA, as the latter was unable to participate. Completed papers are
available under “Programs” at the Center on Japanese Economy and Business’ website: www.gsb.columbia.edu/japan. The
industries and cases were generally selected based on the advice and research of specific industry centers funded by the Sloan
Foundation. These are the computer and software center at Stanford, the semiconductor and software centers at Berkeley, the
financial services center at Wharton, the pharmaceutical and auto centers at MIT, the steel project at Carnegie-Mellon, the food
services project at the University of Minnesota and the apparel center at Harvard. The case writer and research team for this case
thus wish to express their appreciation to the Alfred P. Sloan Foundation for making this work possible and to the Sloan industry
centers for their invaluable assistance. They especially appreciate the guidance given by the financial center at Wharton as well as
the staff at Citibank who were so generous with their time. Still, the views expressed in this case are those of the author and are
not necessarily those of Citibank, Citigroup or their management.
2
a more selective use of package software managed via customized systems, including
proprietary middleware. Conversely, U.S. firms, who have often relied more on packaged
software, are customizing more especially the systems needed to integrate software packages
into something more closely linked with the firm’s business strategies, markets, and
organizational structure. This is especially true when the company wishes to initiate a new
product or service that advances the competitive envelope but for which no packaged software
product yet exists since industry demand has not yet developed. Since Citibank (Citi) has often
been on the cutting edge of new information technology for such new services, it has thus
traditionally relied much less on packaged software than other U.S. firms.
However, though coming from different directions, on the whole there does appear to be
convergence in the strategic approach of the leading software users examined in the Sloan study.
More particularly the cases confirm what some other analysts have hypothesized -- that a
necessary condition for a successful IT strategy4 is a coherent business strategy (Wold and
Shriver 1993). These strategic links between business and technology objectives for Citibank and
international retail banking are presented in the following study.5
4
These and other summary results are presented in another Center on Japanese Economy and Business working paper: William
V. Rapp, “Gaining and Sustaining Long-term Advantage Through Information Technology: The Emergence of Controlled
Production,” December 1998. Also see: William V. Rapp, “Gaining and Sustaining Long-term Advantage Using Information
Technology: Emergence of Controlled Production,” Best Papers Proceedings, Association of Japanese Business Studies, Salt
Lake City, UT, June 1999a.
5
All the cases are being written with a strategic focus. That is, each study examines a firm’s IT strategy rather than the specific
software or IT systems used. In this sense they illustrate how IT is used to improve competitiveness rather than what specific
software a firm is using. The latter is generally only noted to illustrate and explain the former. This emphasis was not specified
when the project began but evolved as research progressed. There are three major reasons the cases became focused this way.
First, at a detailed level, all these firms have unique software and IT systems due to the way each weaves organization with
packaged and custom software. There is thus little others could learn if a study just explained each firm’s detailed IT system or
systems. Further, the cases would be quite long and would quickly drown the reader in data since IT pervades all aspects of these
very large corporations. This was apparent at an early stage in the research when the project team tried to develop IT organization
charts for Takeda, Merck and NEC. The second reason is that at a general level, differences in firm IT systems can be almost
trivial since there are only a limited number of operating system options, e.g. IBM mainframes, Unix workstations, and Windows
or MAC based PCs. Third, information technology changes very rapidly and thus each firm is constantly upgrading and evolving
its systems. So detailed descriptions of each IT system would rapidly become obsolete. For these reasons, focusing the cases on
strategic principles developed as the best way to explain to readers something they could use and apply in their own situations.
This reasoning has been confirmed when the material has been presented in different forums as discussants have commented
favorably on the approach. Equally importantly, in our interviews and conversations with management, this is where they have
focused their responses. That is, as the various cases illustrate, the firms manage their IT decision-making by following a set of
3
The reason business strategies are important in understanding IT strategies is because this
case, along with the others, illustrates that the implementation and design of each company’s IT
system and software strategy is unique to its competitive situation, industry and strategic
objectives. These factors influence how each chooses between packaged and customized
software options for achieving specific goals and how each measures its success. Indeed, as part
of each firm’s management strategy, Citigroup and the other leading software users that have
been examined have linked their IT strategies with their overall business goals through clear
mission statements which explicitly note the importance of information technology to firm
success. In addition, because they use IT to enhance core competencies that they perceive are
important to their competitive success, information technology is specifically linked via
organization, products and services to related corporate objectives. IT is thus an integral part of
each firm’s strategy and its implementation.
Each firm has also coupled this view with active CIO (Chief Information Officer) and ITsupport group participation in the firm’s business and decision making structure. Thus for firms
such as CG, the totally independent MIS (Management Information Systems) department is a
thing of the past. This may be one reason why only limited out-sourcing has been an option for
strategic principles integrated with their view of their competitive environments and core competencies. This is similar to Nelson
and Winter's (1982) rules and routines for other kinds of management decisions and innovations, and illustrates these firms’
evolutionary approach to IT use and development. Their basic reasons for this incorporate the points noted above, i.e. each firm’s
unique IT system, the limited operating system options, and IT’s rapid technical change. Based on what the case study teams
have learned, therefore, it is these firms’ strategic approaches, including the concept of controlled production explained later, that
seem to have the widest applicability and offer other organizations the most potential insights without becoming dated in how to
use IT to improve competitiveness. The detailed strategy described here, though, only applies to international retail banking and
primarily to that targeted at middle income groups rather than Private Banking and high networth individuals.
4
Citibank’s international retail bankers, and to firms with proprietary technology that they believe
will work well with Citi’s existing systems.6 However, the company’s successful business
performance in international consumer banking is not based solely on software. Instead, as
described below, software is an integral element within its overall management strategy with
respect to delivering, marketing and servicing such consumer clients worldwide. IT also plays a
key role in serving larger corporate goals for the bank or Citigroup as a whole, such as enhancing
branch, division or function productivity by improving credit decisions, reducing errors,
managing operations, supporting trading or strengthening customer relations. IT systems are thus
coupled with an approach to marketing, product design, customer service, innovations and
constant cost reduction that reflects Citi’s excellent understanding of its financial services, its
markets and its competitive strengths within the context of this evolving industry.
It is Citi’s precise business vision, especially of mobile telephone banking and global
delivery, that has enabled its consumer banking management to operate at a higher, more
consistent level of performance and customer support.7 It can select, develop and use the
software they believe is needed to assist product groups and branches. In turn, Citi has
6
As of 1995, 84% of U.S. banks with more than $4 billion in deposits outsourced IT services (American Banker 1997).
However, as described in this case, Citi has only done this for small pieces of its systems and not for strategic initiatives. So it is
seen as an outlier in this regard. One prominent example of how Citi closely manages this process even when using packages or
outside programmers is a $750 million project awarded to DEC (Digital Equipment Corp.) and EDS. As reported in the American
Banker (1996) this project was “insourcing” because Citi from the beginning controlled the system architecture and the tools
used, relying on DEC and EDS for execution. The project was designed to link and completely integrate Citi’s 60,000 PCs and
2000 LANs (Local Area Networks) worldwide into a common global network and systems infrastructure. However, Citi had
already done this on its own for 5000 PCs as a pilot in order to establish the prototype it wanted DEC and EDS to follow. It
should also be noted that it has worked with DEC since Citi began developing a distributed processing network several years ago.
However, by hiring the operational and computer servicing tasks from DEC and EDS, Citi freed resources to work on technology
strategy and to make sure the project results met its objectives for a global integrated system.
7
Even prior to the Travelers merger, Citibank (1997) reported that it had the “best banking franchise in the world, “ and that its
“Consumer Business, is singular.” This is because it provides “average people-that broad mid-sector of the market-with payment
products, banking services and investment services that will help these customers achieve their personal objectives.” Further, its
“vision is global” as “both an embedded local bank and a regional bank.” In addition, technology is a key aspect of this vision
since “upgrading technology almost always achieves the dual objectives of improved customer service and greater cost control.”
The “intent is to use technology to remove work, errors, time and paper from our processes, and therefore be more focused on,
and responsive to our customers.” At that time, 51,000 of its worldwide staff were located outside the U.S., and it had 3,200
locations in 98 countries.
5
integrated this software into the total support system for the firm, including related corporate
banking activities such as money management, brokerage and foreign exchange.
Since this view has also impacted other corporate decisions, CG appears to have
connected these objectives to its human resource, organization and financial reporting too. (See
Appendices I & II on Strategy & Operations as well as Firm & Market Data.) Citi also shares
some common IT approaches with other leading software users, such as the creation of large
proprietary interactive databases that promote automatic feedback between various stages of the
product marketing and service process. Its ability to use IT to manage its 97 million credit card
accounts with respect to both credit and cross selling opportunities illustrates this commonalty
with other leading software users. In addition, CG has been able organizationally and
competitively to build beneficial feedback cycles or loops that increase productivity in areas as
different as deposit notification, real-time customer service and life-cycle offerings while
reducing the time to open accounts and the response time to customer inquiries.
CG’s management recognizes that better response time between a client’s request
and Citi’s reaction reduces costs and improves quality since an employee uses less time and
customer satisfaction rises. Similarly, more rapid response cycles more quickly incorporate
recent account information, reducing future errors and calls. Thus customer satisfaction is
improved through more timely completion of the process as well as constant account
enhancement while CG sees the cost of supplying products and services decline. One example of
this use of IT to improve competitiveness through faster response times is CG’s new automatic
deposit notification system that permits Citi to automatically reduce paycheck inquiry calls
compared to the traditional “call & response approach”. In sum, IT inputs are critical factors in
6
CG’s and other leading users’ overall business strategies with strong positive results for doing it
well and potentially negative implications for rivals.
An important consideration in this respect is the apparent emergence of a new strategic
production paradigm, “controlled production” (“CP”), where Citi’s global consumer banking
group is clearly a leader. Mass production dramatically improved on craft production through
economies of scale using standardized products, and lean production improved on mass
production by making production more continuous and tying it more closely to actual demand.
“Controlled” production significantly improves productivity through monitoring, controlling and
linking every aspect of producing and delivering a product or service, including after sales
support and product changes. This is particularly important in international retail banking due to
a rapidly changing global economic and regulatory environment; constantly evolving customer
life-style needs; and continuing long-term account relationships. Such effects are described for
Citi in what follows in terms of its “globalizing” retail banking strategy. They also illustrate that
dramatic improvements in productivity and efficiency are not limited to manufacturing.
However, controlled production (CP) is only possible when a firm actively uses IT
systems to continuously monitor and control functions that were previously parts of a business
structure that only responded to changes in expected or actual demand. Now it can actually
influence or stimulate those changes. This may be why such firms and several industry analysts
see the skillful use of IT as important to company success, including Citi’s (Citigroup 2000),
when it is integrated with the firm’s business from an operation, service and organization
standpoint, reflecting its overall strategy and competitive vision.
This one reason why in Citi’s international retail banking the software and systems
development people are part of the decision making structure within each geographic and
7
functional operation. Indeed, the consumer group has even coined a position called “Cyber
Marketing”. So Seagate Technology is certainly correct for Citi when it states in its 1997 Annual
Report: “We are experiencing a new industrial revolution, one more powerful than any
before it. In this emerging digital world of the Third Millennium, the new currency will be
information. How we harness it will mean the difference between success and failure,
between having competitive advantage and being an also-ran.”
However, the key in Citi’s case to using IT successfully, as with the other leading
software users examined, is to develop a mix of packaged and customized systems that support
the firm’s business strategies and differentiate it from competitors. The management of Citi’s
consumer group has achieved this by using IT to enhance the group’s organizational, product and
service strengths, including CG’s extensive global branch network, rather than trying to adapt
CG’s organizational structure or products to the software used. They have also looked to
functional and market gains to justify the additional expense incurred in customizing certain
systems, including the related costs of integrating customized and packaged software into a
single IT system while training employees to use it as discussed in footnote 6.
This integration is done by first assessing the possible business uses of software within
the organization, its operations and its products. This is done by the business groups and
particular focus is placed on IT’s role in enhancing the consumer group’s core competencies in
developing, producing and delivering to individual consumers many different qualities and types
of financial products and services (Appendices I & II). CG therefore rejects the view IT systems
are generic products best developed by outside vendors because these IT vendors can achieve
low costs through economies of scale and can more easily afford to invest in the latest
technologies. Rather, Citi is selective in its IT choices based on the group’s needs, the cost, and
8
what is available both from the internal IT development group in Los Angeles and outside
providers (footnote 6).
Approach: Methodology and Questions 8
In undertaking this and the other cases to assess the importance for each firm of the IT
related issues noted above, the project team sought to answer key questions while recognizing
firm, country and industry differences. These have been explained in the summary paper
referenced in footnote 4 and are set forth for Citi and its international consumer banking division
in Appendix I as well. The division’s profile presented there is based on company interviews and
other research. Thus readers that wish to assess Citi’s strategies and approaches to using IT to
enhance its competitiveness in international retail banking in summary form prior to reading the
case may find it a useful outline.9 This profile also highlights certain initiatives that represent key
8
Citi and the other cases have been developed using a common methodology that examines cross-national pairs of firms in key
industries. In principle, each pair of cases focuses on a Japanese and American firm in an industry where software is a significant
and successful input into competitive performance. Excepting Nationwide Insurance, the firms examined are ones recommended
by the Sloan industry centers as ones using IT successfully. A leading securities analyst recommended Nationwide as a
replacement for USAA. So all are recognized by their industries as being good at using IT to improve competitiveness. To
develop these “best-practice” studies the research team combined analysis of current research results with questionnaires and
direct interviews. Further, to relate these materials to previous work as well as the expertise located in each industry center, the
team talked with the industry centers. In addition, it coupled new questionnaires with the materials used in a previous study to
either update or obtain a questionnaire similar to the one used in the 1993-95 research (Rapp 1995). This method enabled the
researchers to relate each candidate and industry to earlier results. The team also worked with the different industry centers to
develop a set of questions that specifically relate to a firm’s business strategy and software’s role within that. Some questions
address issues that appear relatively general across industries such as inventory control. Others such as managing the IC
manufacturing process are more specific to a particular industry. The focus has been to establish the firm’s perception of its
industry and its competitive position as well as its advantage in developing and using a particular IT strategy. The team also
contacted customers, competitors, and industry analysts to determine whether competitive benefits or impacts perceived by the
firm were recognized outside the organization. These sources provided additional data on measures of competitiveness as well as
industry strategies and structure. The case studies are thus based on detailed interviews by the project team on IT’s use and
integration into management strategies to improve competitiveness in specific industries, augmenting existing data on industry
dynamics, firm organizational structure and management strategy collected from the industry enters. Further, data was gathered
from outside sources and firms or organizations that had helped in the earlier project. Finally, the U.S. and Japanese companies in
each industry were selected based on being perceived as successfully using software in a key role in their competitive strategies.
In turn, each firm saw its use of IT in this manner while the competitive benefits were generally confirmed after further research.
In the case of retail banking the team was particularly aided by presentations given by Wharton’s financial services group at the
annual Sloan Industry Center meetings from 1997-99 as well as papers produced by that Center. Its website is
http://fic.wharton.upenn.edu/fic.
9
The questions are broken into the following categories: General Management and Corporate Strategy, Industry Related Issues,
Competition, Country Related Issues, IT Strategy, IT Operations, Human Resources and Organization, Various Measures such as
Inventory Control, Cycle Times and Cost Reduction, and finally some Conclusions and Results. The questions cover a range of
issues from direct use of software to achieve competitive advantage, to corporate strategy, to criteria for selecting software, to
9
aspects of Citi’s global retail banking strategy and related IT support.
Introduction to Case10
The Citi international retail banking case begins by placing the global retail banking
industry in a competitive context, and then examines some of the governmental policies,
economic factors, and competitive dynamics which affect its markets and its various players. As
one of the world’s most profitable financial groups, as well as one of the largest and certainly the
most international of U.S. banks (Appendix II), Citi's evolution, competitive situation and
current strategies are integral to this picture, especially as it is the acknowledged leader in
international retail banking.11 Its situation thus illustrates well many of the competitive issues
facing global banking and finance. As competitive pressures mount worldwide in every financial
services market, many major financial services firms and banks are consolidating into global
financial groupings centered on large banks, insurance companies or securities firms such as
Deutche Bank, Zurich International Group, or Morgan Stanley-Dean Whitter (Krawcheck and
Medler 1998). These expanding groups are aggressively challenging more locally based
operations in both domestic and international financial and financial services markets, including
industry economics, to measures of success, to organizational integration, to beneficial loops, to training and institutional
dynamics, and finally to inter-industry comparisons. These are summarized for Citi in Appendix I.
10
While there are connections between Citi’s corporate and retail businesses this case focuses on the consumer side and
especially international activities. Businesses included in the Company’s Global Corporate and Investment Banking segment
serve corporations, financial institutions, governments and other participants worldwide. These businesses cover investment
banking, retail brokerage, corporate banking, cash management, and commercial insurance. Asset Management includes asset
management services provided to mutual funds, institutional and individual investors. The Investment Activities segment
includes the Company’s venture capital activities, investment gains and losses related to certain corporate and insurance related
investments and the results of some investments in countries that refinanced debt under the 1989 Brady Plan. The corporate
segment also includes net corporate treasury results, unallocated expenses, corporate administration, and variances between
consolidated and local tax rates for banking segments.
11
Measuring size and influence in finance and banking are difficult exercises, especially in the international marketplace. The
traditional method of ranking firms by assets is problematic as shifts in exchange rates can alter this picture dramatically. Further
recent mergers in Japan that have created mega-firms in terms of assets have been due to losses and weak balance sheets. These
banks have had to contract global activities as well. So their influence now is mostly domestic despite asset size. In addition,
there are many segments to the financial services market ranging from credit cards, to asset management, to foreign exchange.
Therefore, other ranking criteria are preferable to assets such as profitability, return on assets, market share in key activities,
league tables, and global branch networks. Similar criteria for Citi will be cited in this case. For example, in 1999, the following
10
banking. It is therefore critical to CG’s long-term strategy that it successfully maintains and
expands its position as the world’s leading and most profitable international consumer banker.
Achieving this result involves managing its planned global expansion in retail banking in a
manner that continues to respond to and in many cases lead the worldwide competition in such
banking across a range of products and markets
(Appendix II).
The business pressure to accomplish this task is reflected in the fact that consumer related
products and services represent about half of Citigroup’s revenues and operating earnings
(Appendix II - Table 1), while the international component represents the fastest growing part of
consumer revenues with the least competition. Further there are important synergies between its
consumer business and its corporate bank, such as foreign exchange and asset management that
extend the beneficial impact of a successful global retail bank. Understanding this perspective
helps one understand Citi’s organizational structure, software product choices, and the
company's use and demand for IT. In this way the case describes how Citi is using and plans to
use IT as a tool to extend and deepen its competitive advantage in creating, marketing and
delivering consumer banking products and services in a global context.
But to appreciate IT’s role within CG for this purpose, some U.S. and international
financial industry market and economic characteristics need to be explained, even though this
task is complicated by the number of activities, trends and initiatives occurring globally and in
particular markets. Emphasis will therefore be placed on situations that, from Citi’s perspective,
seem to have the most impact on its international consumer banking and financial product
strategy. Still, one should recognize that in addition to its own efforts, Citi’s international retail
publications selected Citi as the best on-line bank: IBM Finance, Forbes, Worth Magazine, Financial NetNews, and New York
Magazine. It was also voted best bank by International Financing Review, Global Finance and Finance Asia (Citigroup 2000).
11
banking strategy is leading and benefiting from certain continuing mega-trends in finance:
globalization, liberalization, consolidation, product proliferation, and technology intensification.
The Industry Context: Global Financial Services and the Retail Consumer12
It is true that Citibank is using its global delivery capability in combination with a
worldwide IT strategy to define the future of international retail banking. In addition it is
adapting its own life cycle to a number of financial markets that varies based on a country’s level
of development and Citi’s target customers. This strategy in turn is making extensive use of very
smart mobile phones that will do much to leapfrog the PC based programs with which U.S.
consumers are so familiar. So while Citi recognizes that markets help define competitors, with
respect to global retail banking per se, it is currently unique and has no competitors. Therefore
for CG in its approach to international retail banking it uses a matrix structure to manage a large
set of product-market segments. In this regard, it views most of its retail banking competition in
areas such as cards, checking services, and ATMs as local or nationally based. In asset
management, however, the set of competitors is wider, different and more global across the
entire spectrum of products, services and geography. Therefore the key to its global consumer
banking strategy is to efficiently, profitably and interactively capture and transfer the benefits of
12
As reported in Citi’s 1998 Annual Report (Citigroup 1999), its Global Consumer operations include its “global, full-service
consumer franchise.” This encompasses, “among other things, branch and electronic banking, consumer lending services and
credit and charge card services, personalized wealth management services for high net worth clients, and life, auto and
homeowners insurance.” It delivers “a wide array of banking and lending services, including the issuance of credit and charge
cards, and personal insurance products in 57 countries around the world. Global Consumer creates products and platforms to
meet the expanding needs of the world’s growing middle class. “
Citibank North America serves customers through a branch network and electronic delivery. The Mortgage Banking unit makes
mortgage and student loans and the Cards unit offers MasterCard and VISA, Diners Club and private label credit cards. The1998
acquisition of ATT’s Universal Card Services added about $15 billion in credit card receivables. Citi accounts for approximately
15% of U.S. credit card receivables. Globally at the end of 1999 it had about 97 million card accounts. Consumer Finance
provides community-based lending services through branches of Commercial Credit Company (“CCC”). At the end of 1998,
CCC had 980 loan offices in 45 states, including 19 servicing centers for $.M.A.R.T. loans and $.A.F.E. loans sold through
Primerica Financial Services independent agents. CCC’s loans include real estate-secured loans, unsecured and partially secured
personal loans and loans to finance consumer goods purchases. Global Consumer’s insurance units through Travelers offer
various annuities, life and long-term care insurance to individuals and small businesses in the U.S. Thus cross selling between the
various CG units is an important aspect of Citi’s strategy.
12
its global reach to these various market-segments for its products and services in terms of scale
and recognition. The whole will then truly be greater than the sum of the parts.
This approach builds on the group’s history and the continuing mega-trends in financial
services noted above. In this respect globalization and liberalization have gone hand-in-hand.
This trend began in the U.S. in the 1970s, when the U.S. government eliminated the interest
equalization tax on the purchase of foreign assets; ended the gold exchange standard; introduced
floating exchange rates; deregulated fixed brokerage commissions; and eliminated regulated
interest rates for retail bank customers. The U.S. then helped extend these developments globally
in two ways. First, the government continued to liberalize and deregulate the U.S. market. In
response to the S&L crisis in the 1980s, for example, it broke down restrictions on interstate
banking. Indeed, Citi was a direct beneficiary of this trend since in 1985 it was able to acquire a
large California S&L and initiate a presence on the West Coast in the largest U.S. retail banking
market. The Fed also started permitting banks to create securities subsidiaries.
Secondly, the U.S. authorities began to push for similar market liberalization in other
advanced markets such as Japan and the U.K. Partly this was driven by the Reagan
administration’s belief in the benefits of free markets. However, there was also the strong policy
belief that foreign financial firms benefited from U.S. liberalization but that U.S. firms were shut
out of profitable business abroad. This international policy push led in the early 1980s to the
“Yen-Dollar Accord” and a change in Japan’s foreign exchange law that liberalized the
international flow of capital and eventually interest rates as well (Rapp 1999). In the U.K. it
resulted in a “Big Bang” that permitted freely negotiated brokerage commissions and the
purchase of securities firms by banks and insurers, including by foreign banks. Through this
route Citi bought Vickers DeCosta, a British brokerage with overseas offices, including one in
13
Japan. More recently Japan has followed with its own version of a “Big Bang” that will eliminate
fixed brokerage commissions and will permit non-financial service companies as well as
financial institutions to enter all financial service sector businesses (Rapp 1999b & 1999c).
As in the U.S., these market liberalization and deregulation developments have resulted
in national and global consolidation combined with product proliferation. Indeed, in the U.S. the
consolidation of banks that began in the 1980s and led to the formation of “Super-Regionals” has
continued apace in the 1990s. This is reflected in the formation of super “Super-Regionals”, such
as Bank of Boston and Fleet, and even nationwide banks such as the combinations of Chemical
and Chase, or Bank of America and Nation’s Bank. The origins for this situation are found in
U.S. banking history where states generally restricted bank operations and branching to the
bank’s state of origin. So unlike Japan and Europe, there were no nationwide banks. By the
1960s and 70s, therefore, the U.S. had between 15,000 and16,000 banks. Now, due to changes in
Fed regulations, competitive pressures and the resulting mergers, the number is below 10,000
and falling. Bank One, for example, has built a multi-state patchwork quilt of banks over the last
10 to 15 years. Other “Super Regionals” such as Wells Fargo or First Union have done the same.
This has generally resulted in regional splits with no uniformity in geographic coverage between
these various banking combinations. However, there is a difference between the mega-corporate
banks like Chase and BofA on the one hand, and the super regionals like Bank One or Wells
Fargo on the other, particularly in terms of large corporate and international business.
For Citi, however, geographic expansion and mergers have taken a very different tack.
This is partly a result of history and partly of conscious design. Because New York State for
many years limited New York City banks to New York City, Citi’s predecessors, First National
Bank of New York and National City Bank, expanded abroad aggressively at an early date.
14
Many of Citi’s operations date back to the 19th Century. Beginning in the 1980s, the bank
decided to build on this global reach and established historical presence to significantly expand
its consumer business in these countries. At the same time, it decided to do this with a strong
emphasis on technology. This captured for its worldwide consumer business two major emerging
trends in banking and financial services: globalization and technology intensification. It has since
managed this development successfully, significantly expanding its global consumer business
(Appendix II – Consumer Banking Highlights 1999 and 1998 & Table 5).
At the same time, it is apparent that other than the California S&L acquisition, Citi did
not try to keep pace domestically with its U.S. competitors such as Chase and Bank of America.
Rather, its U.S. nationwide banking expansion was in areas such as credit cards, mortgages and
student loans -- not bank acquisitions -- which would gather customers through acquiring bricks
and motor and additional personnel. In retrospect there were probably several reasons for taking
this approach. These include the strong Citibank culture and its significant international as
opposed to domestic orientation. But the route it chose had several other advantages too in terms
of Citi’s core competencies and strategic orientation.
One, these were product areas that required good technology support and database
management; two, they could be migrated to other geographic locations; and three, they were not
branch intensive but could be handled via call centers. In addition, they had balance sheet and
profit advantages since these products could be easily securitized and sold with Citi collecting a
fee for loan origination and service (Appendix II). Over time it also became apparent to bank
management that these were lifecycle products such that today’s credit card customers might
evolve into student loan and mortgage customers tomorrow. Furthermore, such clients can
become intergenerational, as their children grow and develop their own financial needs. So these
15
products supplied an excellent database for cross selling and long term customer development.
Therefore, when the merger with Travelers was proposed in 1998, strategically it was a
much better fit than might been apparent at first to most observers in that the primary motivator
was cross selling and that significant cross selling was really possible (Appendix II – Consumer
Banking Highlights). This revenue-generating approach compares to the cost savings driver
through branch and personnel rationalization and an increased technology user base that has
motivated most of the big U.S. bank mergers. That is, the benefits in most big U.S. bank mergers
are not in increasing geographic reach, but in reducing cost redundancies in areas like credit card
and account administration systems and in associated personnel. The concept is that the high
fixed costs of maintaining and operating a large bank’s IT systems will get spread over more
users. Where there is true branch overlap in addition to user-base economic benefits, such as in
the Chase-Chemical and BofA-Security Pacific mergers, then additional cost benefits can be
realized through branch closings and more personnel reductions. The problem is that while these
cost savings continue, they do nothing to build the business or develop new customers and
products for the combined entity. Further, the cost savings have come at an increasingly high
price for the acquiring institution (Kover 2000) with some firms in 1999 paying over five times
the book value of the target bank.
The Travelers-Citi merger avoided this kind of premium since it was essentially a
friendly merger of equals with both groups bringing something to the transaction that the other
wanted. In the case of Travelers, it wanted access to Citi’s huge global consumer and corporate
client base to extend its marketing reach, while Citi wanted the increased range of financial
products that Travelers could offer. Therefore, no premium was paid. In the consumer area for
example, Travelers has homeowner policies and the bank has a big mortgage business -- a
16
natural cross-selling fit. Also there is mortgage life insurance, which is increasing in popularity.
Citi also has auto loans that are compatible with Travelers’ auto policies. In the case of other
personal and casualty insurance the fit may be less clear, but the groups are operating together to
train and educate the CSRs (Customer Sales Representatives). Furthermore, Travelers’ agents
now have a chance to sell some small business loans, mortgages, and credit cards that by giving
one-stop shopping can lead to more life, auto, and P&C insurance (Appendix – Consumer
Banking Highlights). All this seems to be both working and evolving as CG estimates (Citigroup
2000) that 20% of its new product business came from cross selling. In addition, the group
reports expected cost savings of $2 billion through combining systems and rationalizing
personnel in areas like corporate finance, foreign exchange and bond trading (Citicorp 2000 and
Kover 2000).
The merger has also begun to benefit international retail banking where Citi is the only
truly worldwide player and is defining the market. As already explained, this is partly historical
accident and partly conscious exploitation. Because Citi had an international infrastructure, it put
its retail expansion efforts there. Also, because all the U.S. competition was focused on internal
expansion via acquisitions in the U.S., Citi has had virtually no U.S. competition of any kind for
the global consumer market. Then as domestic rivals bid up the cost of domestic acquisitions, the
cost of acquiring customers overseas looked cheaper and more profitable, justifying further
investment and expansion abroad, a beneficial loop. Indeed, companies like BofA actually
divested overseas operations. In Argentina, Citi was able to take advantage of this by buying
BofA’s large branch network inexpensively. So while some mega-banks have overseas
operations, these are mostly corporate and Citi has been very aggressive in planting a large
number of retail flags across the globe and in refocusing its capital in this direction.
17
At the same time, there are only a few other banks that could play in this game even if
they decided to do so, Chase, BofA, Bank Boston/Fleet (20% of its business is overseas mostly
in Latin America), and HBSC. But no one else has the reach or seems interested. Thus Citi really
owns the market and is rapidly taking advantage of that by not resting on its laurels. The strategy
is to quickly offer its consumer customers a standard consumer banking and financial services
package that gives a common global experience (branches, service and products). Since the
merger, Citi has been adding several Travelers’ products to this menu such as mutual funds,
annuities, and life insurance, depending on the country and local regulations. It has also
benefited from the uncertainty created by global liberalization and deregulation. In several
countries that have had financial crises and continued financial “angst”, ranging from an
advanced country such as Japan to emerging markets such as Mexico and Southeast Asia, it has
also benefited from being viewed as a safe haven.13
But while Citi sees opportunity it also sees cost, at least in the traditional approach to
developing a retail banking business, branches. Therefore its approach to managing its global
expansion in the wide range of product and services it wants to deliver is very technologically
intensive. In terms of risk management, for instance, it learned from the last recession, along
with several other U.S. consumer-oriented bankers, that in becoming more consumer-oriented
diversification of assets and risks is still important. That is, one must understand that the
consumer basket is granular in that not all eggs go bad even in a downturn and that as a whole,
consumer business is profitable. The task from a credit and pricing standpoint is try to screen out
as many bad eggs as possible but recognize some are going to slip through; figure what
percentage that is going to be; reserve for loan losses on that basis and price the product
13
In 1996, 31% of its card earnings came from emerging markets. While this percentage has declined due to economic turmoil in
these markets and the acquisition of ATT Universal, it remains an important and growing business.
18
accordingly. This category analysis is precisely what Citi is constantly doing with its global
customer base using IT based systems while at the same time trying to develop more
sophisticated screens and market segment selection criteria. It seems to be working in that loans
90 days past due as a percent of the retail portfolio, were less in 1999 than 1998 and less in ‘98
than ‘97 (Citigroup 2000 and Appendix II – Table 6). This IT-intensive screening process
becomes even more important as the business cycle matures because that is when business loans
tend to get repaid and consumer loans and particularly the potentially riskier ones tend to
increase as consumers feel more confident about their employment and economic prospects.
In terms of product and service delivery in the U.S., however, Citi’s emphasis on
technology is more a response to competitive developments, whereas abroad it is due more to
economics and market segmentation. One result of the wave of U.S. bank mergers has been
significant rationalization of personnel and branches, but combined with advances in computers
and telecommunications. Another result has been a multi-channel expansion in the number of
ways banks and other financial service firms deliver products and services, such as telephone,
PCs, supermarkets, the Internet, customized voice response, and more smart ATMs. Thus
branches are now a relatively small percentage of the delivery channel. But this multiplicity of
channels has also created customer expectations and therefore service issues. For instance, to
what extent should a customer be able to use a credit card to do balance transfers, or should the
bank be able to use the credit card channel as a sales production arm for other products and
services? These are important considerations since credit cards are a key product both as a source
of profit and of customer data. Banks are using computers and such data to determine a
customer’s propensity to buy a product that is being cross sold as well as to deliver the product.
19
Yet, customers can have privacy and security concerns, and these concerns can have
ramifications for customer retention.
As it is, most U.S. banks have consumer customer attrition rates of about 1.5% per
month. So they have to peddle hard to stay even, and therefore attracting and retaining retail
customers is a critical competitive issue. Though checking is the anchor for the relationship,
banks have found that the more products they offer and the more customers use them, the better
the retention rate. Bernstein Associates (Krawcheck and Medler 1998), for example, reports that
attrition for on-line customers of U.S. banks is half that of those using traditional channels. Thus
U.S. banks aggregate individuals in a proactive sense to retain the customer and get the best
profitability from the relationship. It is banks’ analysis of their consumer market segments that is
the motivating force behind inbound telemarketing, and, in Citi’s case, its message service.
Successful cross selling is a win-win situation for the bank as it improves customer
retention and expands revenues. But according to Citi, the consumer banking business does tend
to follow an 80-20 rule in that 20% of the bank’s retail customers account for about 80% of the
consumer bank’s profits. Indeed, banks are losing money on some customers. Therefore part of
the aggregation and statistical analysis exercise Citi and other U.S. banks go through is to
measure the net present value of certain customer groups, including the cost of getting or
soliciting the customer versus how long the customer remains. From this analysis, Citi has
determined that it is always better to spend some money, such as by periodic reductions in credit
card rates, to keep a highly valued customer compared to the cost of trying to generate a new
customer that is as profitable.
This is why globally in its call centers and branches Citi has developed a total
relationship screen analysis and has given guidelines to the CSRs on how to manage this
20
relationship and when to waive certain costs or fees. In addition, various outside studies on bank
personnel and turnover have found that CSRs who are given a list of customers and asked to
cross sell incremental products are more productive and are more likely to stay with the bank
(Harker 1997 and H&L 1998). This reduces turnover and training costs while increasing
revenues from more product sales, another win-win situation. (See Hunter and Lafkas’s [1998]
study of CSRs and upskilling as well as Harker’s work [1997] on education and bank’s Human
Resource [HR] practices.) Still it is difficult to generate new U.S. customers against someone
like BofA with 10% of U.S. banks’ capital and about 8-8.5% of the deposits that anchor related
business.
In addition Citi has had to respond to the increased technological intensity of the U.S.
consumer banking sector associated with these developments. Technologically based products,
services and competition have gotten especially crowded in the Internet-telephone channel. First
there were the new Internet Banks such as Netbank and Telebank that were then acquired by eTrade; these were quickly followed by traditional banks such as Wells Fargo that added 75,000
Internet accounts per month to over a million on-line customers. Further, credit cards are a
volume computer processing business, and it is easy for a bank or brokerage firm to outsource
this in terms of issuing, processing and securitization; just charging an origination and finder’s
fee. This fee in turn can be covered by the high interest charges that most cards bear. Therefore
card issuance by banks and other financial service firms has soared along with processing
requirements.
In fact, U.S. consumer-related financial services has become a very complex and
segmented market in terms of providers, payment mechanisms, distribution, convenience,
choice, products and services. It is also very very competitive and IT intensive. One only has to
21
look at the collapse in Internet based brokerage commissions for retail investors to see this. Thus,
establishing value added and making a good profit in this business is quite difficult. This is why
Citi’s international franchise is such a true strategic blessing; Citi is both recognizing and
exploiting it (footnote 7). It is doing this even in the U.S. market because CG has the ability to
uniquely segment that consumer market in terms of those who are internationally oriented. This
segment includes the businessperson that travels frequently, the student going abroad and the
student or professional coming to the U.S. from other overseas. So while up until the Travelers’
merger Citi has probably just kept even in consumer banking domestically, internationally the
“Financial Interactive” business that globally develops products and services to use and leverage
the Internet and other telephonic medium has been a winner.14
Since success and profits tend to compound, the international consumer business should
in fact grow faster than the domestic business due to its profitability, weak competition and
unique franchise (Krawcheck and Medler 1998). Indeed Bernstein Research (K&M 1998)
projected in 1998 that between then and 2003 traditional retail branch based banking revenues in
the U.S. would actually decline by about 3% per annum and retail asset management would grow
by only 6% per annum. Only 401(k) plans, 10%, and electronic retail banking, 45%, among
consumer oriented banking businesses would hit double-digit annual growth with the latter being
the clear leader. On the other hand, European and Asian traditional retail was still expected to
14
Citi’s national expansion and use of telephonic services, including national ATM hook-ups, began in 1985 in California, but
did not expand as rapidly as some U.S. banks. It did not use multiple acquisitions to build size domestically along the lines of a
BofA that bought SeaFirst, Security Pacific and Continental. However, right after the merger in California in 1985, it did move to
gain market share by extending branch office hours. It also increased the number of ATMs such that ATM lines were shorter than
teller lines. It initiated a push to expand the ATM instructions available to customers as well, both onscreen and via phone so
almost all customers got over the fear of using ATMs. Another major IT intensive domestic consumer initiative has been its
dominance of EBT (electronic benefits transfer) where Citi manages welfare and other payments for states and DOA. Its EBT
subsidiary now has 27 states and the Department of Agriculture (food stamps) committed to its system, and it is the major player
in the market. While the business is profitable in its own right, it also provides a large database for pursuing additional consumer
business with first time financial service users. Nevertheless, some analysts feel there may be a disconnection between domestic
and international retail with the latter much more innovative and creative. But since Travelers is very sales oriented domestically
perhaps this impression of CG will change given Travelers’ broad suite of retail insurance products.
22
grow 18% and 20% per annum respectively while retail asset management would grow 17% and
29% in these regions. Further, electronic retail would soar to 100% per annum in both regions.
So while domestic rivals will be competing fiercely for a slower growing U.S. consumer banking
market, Citi is well positioned to benefit strategically, geographically and technologically from
rocketing growth abroad. In this way Citi may be able to cream off the consumer segment most
buoyed by the expansion and internationalization of trade, services and finance. For these
reasons, Citi’s consumer business is likely to become even more global over time, while its retail
business in the U.S. will have an increasingly international component that Citi will probably
begin to segment even more effectively in its marketing and customer analysis. Its large branch
networks in metropolitan New York and in California, with their large concentrated and
internationally oriented urban populations, will be added support for this strategy.
Because Citi chose not to go the high price aggressive domestic acquisition route, even in
its domestic consumer banking business Citi tends to pursue areas that are outside of the business
footprint that would require a large nationwide branch network. These businesses include student
loans, multi-application mortgages, and credit cards including co-branded cards (Tables 2, 3 &
5). This orientation is an important reason why the Travelers’ merger made more sense than
might have been initially apparent since its products are not branch or location sensitive either
(Appendix II – Highlights). On the other hand, cross selling opportunities were real and are
being exploited (Citigroup 2000). Furthermore, having selected a product rather than a branch
approach is consumer banking expansion, Citi’s consumer bankers began to recognize these
products formed the basis of a modified life cycle or life-event marketing model, which it
gradually developed for the U.S. market. Under this concept, CG seeks to capture college
students through its credit cards and student loans, and then tracks them as their careers develop,
23
offering products such as car insurance and car loans, then mortgages and homeowners
insurance, life insurance, mutual funds, pension products, etc. Certain colleges may even be
prime targets if they have large numbers of foreign students or students who travel. CG has also
begun adapting this life cycle approach elsewhere, leveraging the fact that these products such as
loans, credit cards, and insurance are not branch specific and that the necessary processing and
technical support can extend across international borders just as they do across state lines in the
U.S. (Appendix II).
Given its international consumer strategy focus, though, CG does not just rely on the U.S.
market to generate products and technology to feed and support this key market and life cycle
modeling activity. Rather it has led in developing technology that is complementary to its global
retail strategy in specific markets such as Japan as described later. This R&D activity is
concentrated in CTI (Citi Technology Inc.) and includes transaction and touch-screen
technology. Citi is also willing to spend the money on the technology required for retail
distribution and to improve customer convenience. So to achieve its customer oriented plans, the
retail division has the resources it needs. Looking at Citi’s website, for example, one can make
on-line decisions, such as registering and getting a pin online, which is more convenient than
some other banks where you have to apply online and get a pin separately by mail.
Organization, E-Citi and Citi’s Global Consumer Strategy15
Product Market Segmentation, Cross-selling and International Leverage
15
E-Citi manages the Company’s Internet strategy and execution, including the creation and delivery of electronic financial
services and e-commerce initiatives. This includes “Direct Access” and other Internet-based transactional banking products as
well as providing to customers certain other electronic banking services such as Global Debit Card Services. It reported business
losses of $142 million in 1998, compared to $79 million in 1997 and $51 million in 1996. Net losses of $144 million in 1998 and
$95 million in 1997, included restructuring charges of $3 million and $28 million. Revenues, net of interest expense, were $147
million in 1998, up from $112 million in 1997 and $88 million in 1996, reflecting business volume increases in electronic
banking services. Adjusted operating expenses of $379 million increased from $239 million and $163 million in 1997 and 1996,
24
Citi’s website in its various forms in different countries is a critical lynchpin in its global
retail banking strategy and its implementation. It was created and is managed by e-Citi, which is
part of Citibank and thus part of Citigroup. While there is an e-Citi group that parallels the
corporate bank, primarily supporting trading, brokerage, and foreign exchange, the consumer
group within e-Citi is responsible for retail banking. This responsibility includes credit cards,
consumer loans, and mutual funds. Its organization runs parallel to the global consumer bank in
that it is divided into four major geographic areas: Asia/Pacific; Latin America; North America,
which includes Canada; and CEEMA (Europe, Middle East, Eastern Europe and Africa). In
North America as elsewhere, the biggest consumer business is cards. Citi has 97 million cards
outstanding globally and 40 million of those are in the U.S. The business includes Visa,
MasterCard, Diners, and Universal. In addition, in North America and other geographic areas, it
has a mortgage group; a consumer banking group, which covers checking, branches and ATMs;
Travelers Insurance; and Primerica. The human resource (HR) function for these groups as well
as other Citigroup businesses is managed centrally at the corporate level. The Private Bank is
separate from the consumer bank, though Private Bank customers often want or need some
consumer banking services such as credit cards and ATM access. Thus there are positive
synergies between the international consumer bank and the Private Bank (Appendix II –
Highlights). All the brokerage and foreign exchange business is in the corporate bank, but there
are consumer and international consumer related business synergies here as well through the
Group’s mutual funds and foreign exchange dealings for card purchases and payments
(Appendix II).
reflecting Internet-based financial services and e-commerce initiatives, and additional investment spending on other electronic
banking services (Table 5).
25
Citibank directly supplies the products to the geographic groups outside the U.S. E-Citi’s
electronic developments are done for the corporation, and the group will sometimes invest in
outside businesses or vendors that it feels will help the corporation generally as opposed to
developing a one-time product or program. Examples of this type of investment are 724 Solution,
Phone.com and Netsentives. These stakes are all minority investments and are done strategically.
Thus e-Citi’s mandate is larger than just the consumer bank; it is corporate-wide and includes
Citigroup’s relations with outside IT suppliers. However, the group within e-Citi that parallels
the global consumer bank concentrates on the consumer side of Citibank’s IT and e-commerce
related activities, and is responsible for IT- related products and services such as direct access
and Citi-Direct.
This last activity goes beyond the PC or even TV Interactive, Palm Pilot, pager, cellphone, or ATM. Basically, Citi-Direct’s mandate covers any device than can remotely access
information and data related to a Citi or to a potential Citi consumer relationship. This is because
Citi is trying to grow its remote access customer base very aggressively on a global basis. In
keeping with its revenue generation customer retention approach, the IT system that supports
Citi-Direct is also designed to facilitate cross selling of all related Citigroup products that any
global customer might want. The plan is to extend Citi’s user base, which can then lead to
increasing returns from both cross selling and reducing systems cost per user. The group knows
it cannot build its customer base just by building branches, even automated ones. This is an
expensive way to try to add clients; the bank will lose money, given that it costs $1.07 per
transaction to use a branch and a teller. Similarly, a Call Center inquiry for a credit card or bank
balance is a $1.00.
26
An ATM transaction or balance inquiry, though, costs half as much. The Internet is even
better than an ATM since it costs between $.20 and $.50 per transaction or inquiry, while
interactive video response is even better at $.30. E-Citi and the consumer bank have discovered,
however, that to retain customers and avoid call repetitions that can escalate a single inquiry’s
cost and increase customer frustration, it needs to have a human involved. This seems similar to
the kind of mix that Toyota has always recognized as essential to optimizing the efficiency of its
production process. This technical/human mix is needed both because the customer may
otherwise get frustrated, but also because Citi has found this combination reduces errors and
improves quality. All this lowers costs, including the opportunity cost of generating a new
replacement customer. Thus, e-Citi works closely with the consumer bank to develop and
implement an integrated strategy that tries to push as much electronics as possible but at the
same time it recognizes the need for physical branches and call centers to provide human contact.
Thus it is Citi’s ability to combine clicks and mortar in the right proportion that is enhancing its
unique competitive advantage in global consumer banking. At the same time, e-Citi and the
consumer bank have also worked together to provide this human element more and more
electronically. Thus in its global branches and over its websites Citi has “network help” that is
customer interactive but electronic. It is called “e-service” and is where Citi is investing
heavily.16
As in this “network help” example, e-Citi is very customer focused, so the group has tried
to develop products and services that are keyed to customer behavior. For example, the group
16
These economics are driving Citi’s technology strategy to support a target of 1 billion customers by 2010 compared to 100
million in 1999. Indeed, as reported in USA Today, April 1998, it is the only way to do it. These economics have also impacted
Citi’s expansion plans in emerging markets. Whereas previously it might have bought a local bank, now it expands electronically.
For example, the Asian Financial Crisis hit Indonesia very hard. But instead of buying a distressed local bank with problem loans
for perhaps $500 million, Citi rolled out more than 40 ATMs in Jakarta with expanded staff support at a cost of $5 million or a
little more than $100,000 per ATM. It is also offering longer hours and telephone banking (Asian Wall Street Journal September
27
has developed a way for customers to pay by cell phone as easily as possible for items they see
on TV by keying through the phone for a particular item. The bank however can sometimes take
too long to introduce various new products and services, and therefore e-Citi has tried to
facilitate a generic solution where outside entities or services can easily access the consumer
bank’s IT system in terms of a hook-up. In cooperation with 724 Solutions, the e-Citi group has
therefore developed a hub or generic connection. This consumer bank hub is plug compatible to
outside providers, who can access it like spokes. The group will give other providers or IT
systems operators the connection and access specifications, which are totally open. Given Citi’s
size and scope it is in fact beginning to define the standard for such access since other banks can
also access and connect to Citi’s hub.
This hub & spoke approach also recognizes that many consumers do not want one-stop
consumer finance shopping. They prefer to unbundle their various financial services and use
different providers. So if you force them to bundle and accept one-stop shopping or make it
difficult for them to unbundle and have their discount brokerage account with a different group
than their banking or credit card, they will go elsewhere and the bank wont even get part of the
pie. Furthermore, if an existing customer leaves, this is doubly expensive since the bank has lost
revenue plus the customer replacement cost. So while the group believes that cross selling is
important and that most customers do not want to unbundle, it has organized itself to manage
unbundled accounts and client relationships. In addition, this approach actually extends and
increases the mix of Citi’s consumer user base and expands the on-going opportunities for cross
selling while raising the revenue base and lowering fixed systems cost per user.
1999). It has thus been able to extend service and exploit the flight to quality to expand market share but with much lower capital
and operating costs and fewer management headaches.
28
This is why Citi lets its products and services stand on their own merits and does not use
technology to force consumers to choose a product they do not want in order to get one they do
want. In this sense the bank’s philosophy is to allow or even help the individual consumer
organize his or her own financial life. Further, Citi facilitates access to all Citi related financial
information by arranging for the data to be stored on the network, therefore any remote device
can access it. One does not have to reconfigure a computer every time one changes PCs or
upgrades. It also greatly facilitates the use of other access devices such as Palm Pilots or more
importantly, very smart mobile phones.
Although consumer access and convenience is the driving IT strategy and philosophy,
security is probably e-Citi’s biggest concern in implementing this strategy. For PCs the minimum
requirement is 128 bit encryption, and for the Internet 64 bit. For the former, the bank provides
its customers with a diskette; outside the U.S. it uses the best of whatever is allowable by law.
But if the law does not meet Citi’s internal security requirements, then Citi does not proceed and
will not offer its consumer customers “e-service” related products until all security concerns
have been met. These security procedures are policies set at the corporate or Policy Committee
level not by e-Citi. From e-Citi’s vantagepoint the idea is to do as much as possible through
direct access without losing money, exposing the bank and customers to fraud, and accepting
avoidable security risks. But these considerations can limit the full delivery of Citi’s e-services.17
In Japan, for example, due to security problems Citi has only limited functions available to
customers compared to what it offers in the U.S., though e-Citi is working with NTT and the
government to resolve the security problems. Thus currently Citi is offering Japanese customers
17
Even at the end of 1996, Citi was “wary of the Internet’s security” and due to those security concerns refused to offer Internet
transaction services even in the U.S. This was despite the fact other U.S. banks were forging ahead. So security is always a
central issue for Citi. Once management is comfortable, though, they move ahead quickly (Appendix II -Global Consumer
Highlights 1998-99).
29
access to their accounts, but they cannot trade stocks, change currency, pay bills or due transfers
via PC, though some of these they can do via an ATM such as money transfers and bill
payments. Thus IT solutions at an appropriate price must still pass internal procedures.
Mobile Phones are the Basis for Citi’s Future Global Retail Banking Strategy
The reasons it is working closely with NTT is because, unlike the U.S., in Japan and
several other countries, especially in Europe and Asia, the mobile telephone will be the direct
access device of choice (Table 4). In Europe there is already a name for this concept, “mcommerce,” which is short for mobile e-commerce. The user base and capital investment cost
numbers are straightforward and compelling. For starters, Citi’s consumer bank strategy and
markets are global, and last year there were more digital phones sold globally than there are PCs
in existence. At the end of 1999 there were about 500 million cellular phone subscribers
worldwide and most of these were using digital phones (Sullivan 2000). Further, digital mobile
phones are much cheaper and handier than PCs. Thus the global market will grow faster. It is
estimated that by 2003 mobile phone subscribers worldwide will exceed 1 billion and over 80%
of these will be digital (Inui 2000). In Japan alone subscribers are expected to increase from
about 40-50 million in 1999-2000 to over 70 million in 2003 (Sawake & Kimata 2000), and use
will be virtually totally digital. In addition, the processing capacity of these devices is growing
quickly such that technologically, they will keep pace with data transmission requirements. ECiti’s research has also indicated that Citi’s customers are only interested in moving data and not
in contextual presentation such as fancy websites littered with advertising, Yahoo watch out!
Also, transactional capability and moving data around does not require a GPU or general
processing unit -- that is -- one does not need a computer. Even skeptics admit, with respect to
30
the mobile phone as a data transmission device, that for stock prices, money transfers and similar
requirements the mobile phone will be highly efficient (Inui 2000).
One only needs security, privacy, reliability, speed and accuracy. Fancy graphics are not
required or expected. Indeed, not having graphics, advertising or similar irrelevant contextual
content helps to increase device transmission speed and reliability as not so much information or
bytes need to be sent. The reduction in data transmission requirements is astounding since as
much as 90-95% of what you see on your computer screen is such information and only 5-10% is
the data content. Further, Citi can transmit that data at a rate of 10K/sec or 10 Kilobytes per
second, but it can transfer the attractive pictures at only100 bytes per second. So transmitting just
the data is at least 100 times faster and more productive than transferring everything on Citi’s
website, even if it is not as pretty. Even allowing for the fact that encryption adds 50 to 100
percent on top of the data and thus decreases transmission speeds somewhat is not enough to
change the tremendous benefits. Further, because transmitting everything on the web page in
encrypted form really slows things down, the customer gets impatient with the wait. Citi’s
research indicates even 30-40 seconds is unacceptable. So it has found that by using the cell
phone and just transmitting the data, customer satisfaction and service reliability increases, all
without compromising security.
Introducing direct access and the digital cell phone technology has been a two step
process for Citi. First Citi developed a system of direct access for customers who could call a
Citi number directly or via modem if they were using a PC. More recently, however, the access
is through the Internet and Citi’s website via an Internet provider (ISP). The customer thus goes
to Citi’s website to log into his or her account. Citi feels this development has improved security
and has also opened the possibility that any device with Web access can be used to get data from
31
an account and to send instructions. The main requirement needed to accomplish this task
efficiently and seamlessly is automatic identification of the type of access device being used so
that in the case of a mobile phone Citi can automatically filter out the extraneous content other
than the data required.
The only drawback to the new system is that Citi gets more calls that are related to IT
support or problems at the Internet provider, such as a Cisco router going down as opposed to
calls regarding Citi’s system and its operation. The problem from e-Citi’s perspective, though, is
that this still is part of the customer’s total IT experience using Citi. So the bank must help
customers fix these problems, to prevent them from going to a Citi branch or call center out of
frustration, or worse, migrating to another bank or financial services provider. Therefore, e-Citi
works hard to make sure the data is getting to the customer and that the links are reliable. The
group works with the ISPs (Internet Service Providers) on their access to the Citi hub described
above.
Further, just as the telephone and telecommunications companies do, Citi imposes
reliability and security requirements on the ISPs if they want to have access to Citi’s hub for
their ISP customers. Since financial services are usually a big part of a customer’s ISP demand
requirements and Citi is a big provider, it can usually impose these criteria on the ISPs without
losing customers, especially if customers understand the reason for the issue. This gives Citi
good control over these links, and if Citi has this control, then it knows the route the data is
taking. Just like an ATM, it becomes a controlled network, and e-Citi can respond knowingly to
customer inquiries as to a network problem versus a problem that may be within Citi’s system.
However, to make sure that the problem is never within Citi, it has built Tandem
reliability into its IT infrastructure. This Tandem back up is on what Citi calls “Hot Standby” in
32
that it is ready to takeover instantly. It is a complete mirror of the IT systems used elsewhere.
From Citi’s viewpoint this is as “Bullet-Proof” as it can make the consumer banking IT support
system, and it is triple over-engineered. In this sense, Citi relies on the telecommunications, ISP
and Internet network, but it protects itself by weeding out unreliable ISPs or telecoms and makes
sure that its own system will not be the source of a problem. It in turn provides what it knows
best, which is security, managing a huge customer market segment database, and processing
financial transactions for customers. For all these reasons, Citi has been trying to move its
customers to the phone and particularly the digital mobile phone by making it an attractive
feature of the bank’s global consumer service. It has also assured that customers in Asia and
Europe can call anytime and get a real person and not an answering machine, further increasing
the phone’s attractiveness.
In addition, Citi has established a mechanism so that when customers call on their cell
phones they have the option of talking to someone or accessing the Internet to get information
directly from their accounts, to conduct some other transaction, or to receive e-mail. It is
currently doing this via GSM, the common standard in most of Asia and Europe, and it combines
this with SMS (Short Message Service), which prints text on a screen including a PDA or a cell
phone’s screen. Over 350 million of these types of phones have been sold, and they represent
80-90% of the new phones being sold in Europe and Asia. In 2003, the installed base should be
about a billion. It will also be easy to migrate to the new third generation standard, G-3, which
will also be compatible with Japan on an interconnection basis. So Citi’s hub and spoke
connection strategy has prepared for this.
The access system is also flexible enough to fully serve the U.S. Although the U.S. is not
leading in the mobile phone area, and at the end of 1999 was still the only country where PCs
33
outnumbered digital phones and where analog phones were still widely used, Citi’s plug
compatible hub strategy can manage and accommodate both regimes. But its mobile phone
initiative will continue to place it at the forefront of global consumer banking. This is because in
Australia and Japan over 50% of the adult population have digital phones, in Finland over 60%,
and in the U.K., Germany, Italy and H.K. 40-50% (Appendix II - Table 4). On the other hand,
even in some advanced countries such as Italy PC penetration is quite low. In all emerging
markets digital phone use exceeds PC use by a wide margin. Since the U.S. lags this
development, it can be serviced for PC access, but it cannot be used as a model for the
appropriate approach to e-retail banking in the global environment because other countries are
leapfrogging and going directly to very smart digital phones. Citi sees this trend and is using it to
its advantage in combination with its global branch network and extensive physical presence in
almost 100 countries.
Products, Service Support and IT Selection Strategies
Having developed this IT delivery and service capability, however, and having integrated
it with it an interactive voice response system, Citi found there was more demand for the voice
response system than it had anticipated. This would necessitate a big investment in expanding
call centers. Since one call center’s capital cost can be $350 million plus on-going personnel
costs, this was not a trivial issue. Thus, e-Citi directly analyzed the problem and found the call
volume was concentrated around certain days of the month. Further analysis indicated this
activity was directly related to people calling to see if paychecks had been deposited. The call
volume was concentrated therefore at the beginning and end of the month due to the
predominance of bimonthly salary payments.
34
Since many customers called several times a day and accessing these accounts by the call
centers involved security and protection of account information, these surges were very timeconsuming and costly. More importantly it was going to necessitate an expensive increase in call
center capacity that would impact consumer bank profitability. Thus, e-Citi investigated the
possibility of generating a message that would be sent to a customer’s cell phone as soon as the
deposit was credited to the account. It also worked with the telecom-companies so that Citi could
give them the software necessary to generate the message and reduce traffic. Citi piloted this
system in Poland and worked out an arrangement with the Polish phone-company to pay a fixed
rate to send the message to Citi’s customers’ cell phones. Citi then got permission from its
customers to have the message sent, and as of December 1999, 67% of customers had signed up
for the service.
The results have been astounding; IVR or Interactive Voice Response calls dropped
dramatically and are now flat throughout the month. So Citi has not had to build at new IVP and
will save millions. Also, as the system is “Bullet-Proof,” customer satisfaction has risen, and Citi
now also has the possibility that it can send other messages in which the customer might have an
interest. It can also do things that are just plain customer-oriented and friendly such as greetings
like “happy birthday” or “congratulations”. This new service efficiently expands marketing and
cross selling opportunities too, and the head of technology (CIO) sees many broad possibilities in
this message generation concept. Indeed, it could apply to a wide range of consumer banking
products across the life cycle model that include credit cards (Visa, MasterCard, Diners and
Universal), loan products (mortgages, student and car), and investments (stocks, mutual funds,
and 401(k) plans). It thus plans to implement this idea more broadly, including in Japan.
35
Japan, A Microcosm – Synergies, Affiliations and Reach18
History of Citi’s Japanese Consumer Banking
Japan is the world’s second largest economy and a very advanced country with
substantial assets where Citi has had a presence since the 19th Century. At the same time, it has
many of the world’s largest banks and has proved a difficult market to crack for most of the
postwar period. Yet, the collapse of the Japanese Bubble in 1990 and the continued weakness of
Japan’s economy and banking system has created opportunities for foreign banks and other
foreign financial service firms (Konishi 1999 and Rapp 1999 and 1999c). Since Citi began
expanding its retail banking activities in Japan in the 1980s, its timing to take advantage of such
developments has been good. That is, Japan has been a part of Citi’s expanded global retail
banking initiative since it began in the early 1980s. The initial idea was to take advantage of the
bad retail bank experience of most Japanese depositors, and Citi began opening some branches
as well as developing a branch support and back office infrastructure. It also developed an
affiliation with Dai-Ichi Kangyo bank to supply ATM services and introduce bank credit cards.
It initially experienced some problems attracting credit card customers as there was no
perceived market need for these cards and Citi had difficulty positioning them in the market.
Then in the late 80s and early 90s, Citi had some global financial difficulties, and the collapse of
Japan’s Bubble compounded related concerns in the minds of potential Japanese clients.
Therefore depositors shied away. It was at this time that Mr. Yashiro came from Exxon to head
Citi-Japan. Because of Exxon’s retail gas stations, he had good retail branch experience. He also
knew how to successfully position a foreign company in Japan in a retail business. In addition,
his political instincts were excellent, having dealt with the Japanese government on energy and
18
Including Japan, Citigroup’s Asia-Pacific consumer financial services is strategically critical because as the recent economic
turmoil in the region subsides, Citi expects that by 2005 these activities will account for 9% of CG’s total profits despite efforts
36
oil issues for many years. He saw the need to reestablish Citibank’s credibility and to break into
a large local distribution channel with a set of products. This is when he came up with his
brainstorm to affiliate with the Japanese Postal Savings System in 1994-95. In turn, the Post
Office was interested in a Citibank relationship because defined contribution plans were coming
to Japan. It wanted to have a piece of this asset management business but did not have the funds
management capability or experience which Citi could provide. In addition, its Postal Savings
customers could now have international ATM access through Citibank’s global system.
At the same time Citi’s consumer banking activity gained immeasurably because even
though by 1994-95 the bank had fully recovered financially, there was still a perception in the
Japanese market that it was weak. And since Japanese banks were also having problems,
customers were not differentiating between Citi and other banks. However, the Post Office
affiliation created the perception that the Japanese government and the Postal Savings System
were vouching for Citi’s financial credibility. It was as if the government was saying that Citi
was not going to go bankrupt like some Japanese banks. Secondly, the relationship gave Citi the
extensive financial distribution net that it required through more than 20,000 branches of the Post
Office and the ATMs. So Citi now had Japanese consumer credibility, a nationwide service
capacity, and a potential distributor of asset management services for Japan’s defined
contribution plans, once they came into place. The key to making this work on a practical basis
was an ATM support system. At this time IT became a critical input to actually implementing
the strategy. This is because only an efficient IT connection could enable Citi to completely
bypass the issue of having to create a Japanese branch network and still have a very positive
marketing impact in Japan for Citi and its consumer banking products. Further, once the bank
had a customer, it could begin to market other products such as credit cards and mutual funds.
by HSBC its biggest regional competitor (Citibank 2000).
37
To make this IT connection seamless Citi sent its own team of software engineers and
programmers to work with the Post Office to create and manage the interface between the two
systems. Japanese banks complained about preferential treatment and were thus permitted to
access the P.O. system too, but their customers have to pay a fee. Further, the formal tie-up has
given Citi credibility at a time when Japanese banks have been losing customer confidence
(Rapp 1999c). It has thus been a type of co-branding strategy, and as Japan’s economic and
financial crisis got worse, Citi benefited. At the same time, having established a bricks and
mortar distribution channel, Citi’s marketing emphasis has been on a remote basis using the
Internet, telephone, ATMs, call centers and mail. It wants customers to feel comfortable not
coming to the bank, even though its studies have actually indicated that one half of Japanese
customers do not go to their banks, especially in large population centers. And in fact Citibank’s
own customers seem to operate similarly in that about 50% never come to a branch. So Citi
continues to believe there is real potential demand in Japan for its consumer banking services,
especially if it can serve this type of customer better than Japanese banks do.
Therefore remote banking is the way Citi plans to blanket Japan with Post Office, branch
and ATM delivery support as needed. At the same time, when a customer does come to a branch,
Citi wants the experience to be pleasant and productive. So Citi has developed model branches
that it applies globally with the automated service areas being closest to where the customer
enters the branch and the service or business offices inside or even on a different floor. Often it
will develop retail-banking ideas in other markets and then import and adapt them to Japan. The
biggest market from Citi’s perspective in this regard is credit cards and all customers who open
an account are asked if they want a card (indeed, the application form for the card is on the same
form as the application to open an account). Thus Citi is definitely trying to grow this business
38
and increase share. It will also co-brand cards for similar reasons, and it did one for Japan with
Northwest Airlines combined with a frequent flyer miles incentive.
Japanese Consumer Bank and E-banking
At the same time, Citi’s success and approach to achieving this result illustrate very well
how it has been able to combine different aspects of its consumer banking strategy, including IT
usage, to create a competitive edge. This is because to increase its Japanese consumer banking
business it has used a combination of physical branches, strategically placed ATMs, IT,
affiliations, Internet/telecom delivery, and global products targeted at middle class customers
that are interested in its international reach. This approach has been complemented on the
corporate side through asset management, brokerage and foreign exchange support.
While the Japanese consumer bank subsidiary used to report through the regional
headquarters in Singapore, due to its size and long history, it now has more autonomy and
reports to the consumer bank headquarters in New York. However, there is still a close
connection with Singapore, since this is where the head of consumer banking for Asia resides
along with the major IT hub for Asia. That is, the computer center that supports Asian consumer
banking including Japan is located in Singapore because these centers require a certain scale to
be efficient. So what Citi has in Japan as in other Asian countries is a systems network that is
managed by the computer center in Singapore. This gives Citi computer economies of scale
without sacrificing local autonomy or requirements such as reports to governmental authorities.
Citi’s approach to the implementation of this concept is to replicate this type of IT system in
every country with a direct link to the regional computer center. Its global systems strategy for
retail banking is to try to move towards two IT centers for the world.
39
An IT country head manages IT for Japan and the connection to the Singapore regional
center. All Japanese data is consolidated in Singapore due to scale requirements, concentration of
IT personnel resources, and potential earthquake damage. The last is very important since during
the Kansai earthquake Citi-Japan was one of the few Japanese banks that could continue
operating without disruption. On the other hand the JCB Alliance could not respond for 72 hours.
Since people often need to travel and buy supplies in crises, earthquake issues are serious, and it
important for Citi’s credibility and reputation in Japan that it can function normally during such
periods. Further, even after the quake, data integrity and security remained factors.
The Japanese consumer bank’s marketing campaign has been targeted at people who will
keep an account balance of between 100,000 and 500,000 yen. Initially, this campaign to
increase the number of customers was untargeted across the perceived marketing base with no
real discrimination among groups. So there were deficiencies in this method of attracting more
customers. Therefore the consumer bank has worked with the marketing department on a more
focused approach that relates product introductions to perceived weaknesses in local competition
combined with an analysis of how customers actually behave. This activity involves extensive
database development combined with a statistical package to analyze the data. Account officers,
administrators, and marketing people all have access to the data and the analysis packages which
are on-line in real time. This allows managers to access and generate reports by customer and
product; helping them manage the product marketing strategy by segment. A software company
called SAS provides the on-line statistical and data analysis software that helps the bankers to
analyze the data and do reports in a standard format. Officers have to do the reports, but the
software package helps them create it and make it meaningful. Also, there are templates that
extract certain information that managers and senior managers want to see and that insure the
40
format has some commonalty that allows comparisons and aggregation between officers,
branches, products, countries, and regions.
In order to do this well, Citi’s Japanese consumer group needs a good combination of
people and IT since experienced bankers and statisticians can interpret more from the data using
Citi’s database and the basic sampling theory provided by SAS than those who are less
experienced. The consumer group especially sees the need to link people and ideas more closely
with the facts generated by Citi’s own database with respect to actual customer behavior. Thus
the Japanese consumer bank produces both standard reports and ad hoc reports. The latter are
related to various initiatives whereas the former are done daily so managers have timely
information by class of customer and for target customer groups along with a statistical analysis
of what is occurring with respect to penetration, product use, profitability, credit, fees, and
timing.
One example of this is that the consumer group spends considerable time analyzing how
customer segments actually use their credit cards in terms of spending patterns over a twelvemonth period. This is a huge data history that helps Citi know its global and Japanese customer
base. Further, because Citi has more than one type of card, such as one million worldwide
Diner’s members (which is usually a business card), plus ATT Universal’s 8 million cards that is
another base, it can do even more market segment analysis, country comparisons and targeted
marketing.
In comparing countries, for example, it can explore differences in spending patterns due
to levels of economic development or regulatory regimes that might suggest future changes or
opportunities to introduce new products or services in a given location. This is a key benefit of
Citi’s global reach because it has so much data from so many customers in so many different
41
countries. No one else can do this type of analysis. Others just do not have the global scale and
scope in consumer banking that Citi does. This database management advantage helps it to
extend its worldwide lead that in turn builds its international consumer base that leads to better
information as well as more cross selling revenue generating opportunities and lower costs due to
more users. All this is interactive and tends to compound over time since the idea is to build
relationships that can lead to cross-selling other existing or new products. It has also helped it to
develop and expand its Japan consumer business.
In Japan the first step in this market segmentation analysis has been to break into buckets
each product market segment that is now subject to change due to deregulation and increased
competition. This first step is Citi’s method of identifying competitors’ potential vulnerabilities.
The second step is to determine if Citi has a product or could create a product that could access
that market segment to take advantage of the competitive situation. This analytical approach can
work whether the group proceeds first by looking at a bucket or at a particular product. For
instance, a second step in assessing the card business would be to establish which bucket of
opportunity could be accessed via customers using a credit card, and if so, how? And for which
customers and with what kind of credit card based product or service? The SAS PC software
package helps the consumer bankers identify such credit card customers for a particular product
or service and marketing opportunity. It breaks down Citi’s various customer bases into what it
feels are meaningful groups. It is constantly upgrading and improving the IT packages it uses to
manage this and associated customer relations. The Japan group’s normal approach to a
marketing campaign to sell a new product or service to a customer group is to start out small in
order to gauge overall customer response. It may even send a different message to different
customer groups depending on the analysis of each customer segment. The customers will then
42
contact the call center and a CSR if they are interested, and Citi will track the responses by
segment. This method used to be very expensive because the person at the call center had to go
through a schedule of questions to identify the customer and establish security. This all takes
time and is costly and inefficient, and thus restricts the products Citi can offer its’ clients
profitably.
Now Citi has developed an IT telecommunications system so that when the CSR gets the
call the equipment can identify where the caller is calling from, the account relationship, and the
campaign. To the extent this is not automatic, Citi’s target is to key in a minimum of data so that
the call center and CSR can identify the customer within 5 seconds of receiving the call. Further,
once the customer is identified, the call center’s CSR will have the customer’s entire relationship
with Citi across all products and businesses on the screen. In other words the call center CSR has
the client’s full financial relationship with Citi and has the authority to make certain changes,
market specified products, or solve particular situations and issues on the spot in any account. So
the customer feels and in fact is getting one stop shopping and service rather being passed along
a telephone loop that takes time and increases customer dissatisfaction -- a doubly losing
situation for the bank. Further if a change is being made, such as an address or phone number
change, all accounts are changed together rather than by piecemeal. This saves both the customer
and the bank time and money, compared to multiple calls to different call centers, e.g. one for the
bank, one for credit cards and one for brokerage. For Asia the call center that handles smaller
countries is in Australia. For Japan it is in Okinawa, except for English language customers,
where it shifts to Australia. There is a dedicated leased line between Australia and Singapore so
that the communication between the call center and the computer center is only 5 seconds.
43
Citi’s consumer marketing group uses a number of screens or criteria when assessing a
campaign or product, especially as the group wants to avoid campaigns that are likely to be
unsuccessful or even if successful too expensive. The latter usually fail due to a customer service
issue. That is, if the campaign or product will require a lot of information to be delivered on a
full service basis in order to really give the customers what they want and expect, this is likely to
be expensive. One way to reduce this expense as explained above is to allow or empower the
CSR who has access to the customer’s full relationship with the bank to take independent action.
One area where the CSRs already have this power is to waive fees associated with a new product
or service based on the customer’s total relationship with the bank. The CSRs are normally given
parameters or guidelines on this in terms of how good the total relationship has to be to justify a
fee waiver but within those guidelines they are free to use their own discretion. The success of
this approach is very much in line with Harker’s (1997) and Hunter & Lafkas’ research results
(1998) which indicate that empowerment and “upskilling” improve both CSR productivity and
cross selling. Also, Citi incorporates the guidelines and rules for the CSR’s empowerment on the
screen and the terminal allows each CSR to make or input the necessary changes or information.
So he or she has both the information and the authority to use the data to better serve the
customer. Citi can also go back later and assess how profitable this business or the decision was
by account and product. However, one direct result of this greater CSR efficiency is that more
products and services can now meet Citi’s profitability test, offering more potential to expand the
total consumer banking relationship. As already explained, this can then reduce customer
migration, further improving the potential benefits to the bank.
Citi also wants its customers to be able to access the data and manage the services related
to their Citi accounts without having to contact a call center or branch, which is more expensive.
44
Calls are not the best way to give or transmit information to the customer or for the customer to
send instructions to Citi, and, for some services, it is definitely not optimal. For example, to
transmit funds the customer should definitely use the Internet. The device of choice for Citi in
this respect is the GSM digital mobile phone. It is here that Citi believes the U.S. is behind the
rest of the world since many U.S. mobile phones are still analog and the U.S. is more PC based
as well. In this regard, since it made the switch 8 years ago, Japan is actually more in tune with
Citi’s strategy than the U.S. In Japan the mobile phone is now a consumer electronics product
and more than 50% of the population has one, which is more than the land or wire based system
(Sawake & Kimata 2000).19 I-mode in particular is very complementary to Citi’s strategy since it
facilitates Internet access and is catching on very quickly. In Japan with a digital phone one can
now send messages via the Internet, and since 1999 any web page is I-mode compatible. Many
Japanese users are thus switching from regular digital to I-mode (Inui 2000).
Usually when one accesses the web, one also accesses a lot of screen graphics, but Imode translators exist and can cut down or edit what is sent. As already explained, these eeditors substantially reduce and speed data transmission of a textual version that incorporates
only the essential information a user really wants. Windows CE is too big an operating system to
be useful in this respect. Most mobile phone makers and telecom providers believe Psion’s Form
Factor and Palm Pilot (Chowdhury 2000) will serve this function. Thus these systems will
probably be part of the next operating system standard, G-3; and Nokia, Matsushita and others
are working to build it. This development will yield a handheld device that will send and receive
e-mail. There will also probably be advances in how information will be put into the device,
moving from a keyboard with numbers to voice recognition, which in turn may enable devices to
become even smaller and lighter. Citi definitely sees a move towards an international standard
19
Hong Kong, Finland and many other Asian and European countries have similar high diffusion rates as seen in Table 4.
45
that everyone accepts or can interface, which is W-CDMA or the G-3 standard. This does not
mean Citi’s consumer banking division will not serve PC users or users of other devices. PC
users will be bundled or unbundled in terms of their Citi relationships and will have access to all
their accounts and data with all the pretty peripheral context, as well.
But Citi will be organized to give essentially the same service any time and any place to
the mobile telephone users, and this is where the big numbers and instantaneous service
capability lies. In this sense it is up to Citi’s consumers to decide how they want their
information delivered and over what kind of device. Citi will just facilitate access to its site for
any of these devices. However, by emphasizing the mobile digital phone, it expects to impact
and service the largest part of the global consumer market, and especially its target, the middle
class market. This is because given the current socioeconomic conditions, its target customers of
young upwardly mobile professionals, international travelers and business people in various
countries are likely to be a larger proportion of the mobile phone market than of the total retail
banking market. At the same time, many will not be PC users. Citi will also be riding the next ecommerce wave, “m-commerce” or mobile e-commerce, which many analysts in Europe and
Asia see as explosive.
Given this IT approach and what Citi sees as the evolving global standard for the digital
mobile phone, the consumer bank still has to have a product strategy to use in this environment
since it is in financial services not in the IT or telecommunications business. This financial
services’ product strategy is and will be driven by a focus on the overall customer “relationship”.
This customer focus will drive how products are broken down into service units and the way
accounts, products and services are linked. For example, checking will be linked to credit cards
and investment accounts, which might include brokerage and/or mutual funds. Loan, mortgage
46
or insurance products will also be linked. Furthermore some of these accounts can be managed in
an automated manner, such as paying the monthly credit card balance, mortgage payment or
insurance premium from the checking account. Citi hopes to be able to offer better interest rates
or lower service charges for customers who agree to these linkages since processing costs will
drop. This should attract customers and decrease their desire to unbundle their financial services
with the associated benefits of greater client retention.
Also on brokerage or fixed income investment products, Citi will query the customer as
to his or her investment objectives and risk tolerance relative to the funds a customer has to
invest. Citi will then start to formulate an investment portfolio profile that can facilitate
investment recommendations and mutual fund sales. At the same time, given this access and
customer flexibility to move funds around, for security and customer support reasons, the bank
has to have a level of control. It has to be able to say stop when everything is not in order.
However, this frequently leads to a client call or branch visit, and often the customer can’t fully
explain the problem to the call center and CSR without showing or referring to what is
happening on the screen. Thus, to really address this issue electronically and reduce customer
complaints, Citi must be able to show the data on the mobile phone at the same time that the
person is talking to the CSR. Then both the person and the CSR can see, understand, and confirm
what is happening in the account. This dual streaming of voice and data is the next wave of IT
based service, and Citi is getting ready for it.
This combination of data and voice streaming will also enable Citi’s consumer bankers to
send product alerts to even smaller and more targeted groups of customers, say all doctors in
Hong Kong or all University students in Osaka. In this manner Citi can refine its consumer
products and services to target even more precisely smaller market segments and to then send
47
these customers’ cell phones a message, which will come both verbally and with data. However,
breaking customers into smaller market segments means the consumer bankers need to be more
involved in analyzing these segments and the bank’s database and in creating the rules for the
CSRs that apply to managing each client group. Once the rules are in place, the bankers can
iteratively program them and build consistency into the system and its application before
proceeding to the next level of analysis and segmentation. This evolutionary progression is
important since each marketing program builds on the previous one.
For example, Citi has an incredible database covering the credit card payments by its
customers. Reversing the analysis of that data flow means it knows which customers using which
cards are buying certain products and services, in what volume and where. This is information it
can share with various vendors of those products or services to solicit their credit card or other
banking business without giving up customer proprietary data. Rather Citi just agrees to send out
a targeted alert to those specific customers about a sale or special or some other marketing
information from the merchant or merchants. It can also encourage customers interested in
buying a given product to approach Citi to see if Citi can find them the best deal. Thus the global
consumer bank sees itself acting as a facilitator in transactions between merchants and its
customers. This is one way it plans to break into a greater volume of such transactions in Japan
and elsewhere.
It can also give its clients credit information on a vendor and vice versa if they request it.
In this sense the PC, the mobile phone, and similar devices begin to substitute for direct access to
a branch, ATM or mailing. Further, Citi believes it is following a global mega-trend in that every
country is moving to adopt global standards for these devices and increase its e & m-related
business over time. In turn, what works globally will eventually evolve into a local standard
48
once international pressures come to bear. But currently as it is ahead of the curve in some areas
and countries, it still has to be patient. Thus, presently it is constantly making choices or
tradeoffs in each country between the local standard, consistency with Citi’s system, the law,
global regulations and standards, and sometimes U.S. law such as on encryption. However, one
principle that over-rides all these considerations is that it will not compromise on security or the
integrity of the customer’s account and account data.
For Japan as for other countries, there is a technical person in Los Angeles for Japan who
assists the Japanese consumer bank in balancing these various issues and who is the interface
with the Corporate Policy Committee that sets the rules governing these tradeoffs. Once a system
has been decided, Japan is responsible for translating it into Japanese, but L.A. is responsible for
making sure that it is compatible with the rest of the Citi system and corporate security policies.
Since this usually involves accessing the Citi “Hub”, L.A. is responsible for managing the
“Hub”. This includes making the protocols available to other systems that need to access it, i.e.
opening the standards; as well as getting reciprocal information from other organizations. This
means L.A. manages those IT interfaces as well as the associated human relationships with those
outside systems such as those of other financial institutions or ISPs.
While Citi has been using IT in combination with banking for some time, e-banking in
the form of e-Citi was only formed in 1996-97 (Table 5). The e-Citi group studied what existed
and where success and failures had occurred. The group then developed a 5-year plan to identify
what the bank would like to deliver to the consumer and how. As part of the plan, it prioritized
these products and services based on what could be done technologically. It has then worked
with L.A. to negotiate a price and time to completion for the IT related to each product and
service. It compares this price and IT package with offers from outside vendors, and then relates
49
this system and its cost to the expected revenue, profit or cost saving on the product or service
after introduction of the new IT system. This is always done because the business or service unit
that the IT system will support is the one who pays for the IT. Thus the net impact of an IT
initiative hits that unit’s bottom-line positively or negatively. Logically, the manager for that
product or service will not accept an IT project unless there is a net cost and/or revenue benefit.
All outside vendors also have to comply with Citi’s rules and protocols with respect to
connecting to its Hub and they need to build this requirement into their offers.
One example of this type of cooperative effort in Japan has resulted from NTT’s
introduction of I-mode. The Japanese e-Citi consumer banking group translated the information
about I-mode for L.A. and then reduced it to the number facts L.A. had to know to develop an
interconnection that would enable Citi-Japan’s I-mode users to access their account information.
Similarly, in developing the Japanese debit card with other banks, Citi was able to get between
the customer and the merchant to deliver value along the lines described above by using a
potentially real time open system. The criteria the Japan group used in selecting its software were
that the IT system used had to be something simple, secure, and based on trusting the merchant.
Japanese consumer marketing also has created focus groups for the kinds of financial services
customers would like for certain events or over the course of their lifetimes. This is the start of
adapting Citi’s life cycle model to Japan and developing a set of life cycle profiles based on its
Japan customer base that will evolve over time.
Given its strategy, the priority IT development areas for e-Citi in Japan include security
with NTT and brokerage reporting software with NRI (Nomura Research Institute). The latter is
important as Citi wishes to extend, link and integrate its corporate relationship with Nikko to its
consumer banking activities. E-Citi Japan is also trying to work with merchants and suppliers,
50
i.e. various supply chains, by tying its systems into the merchants’ systems and by helping to link
the two so as to speed payments. If successful, this will impact both its customers and the
distribution of goods. This service is called Citi-Wallet and is a more concrete part of the effort
to get between the customer and the merchant both to speed processing for on-line firms and to
directly access the merchant.
Citi-Wallet already exists in PC mode. If existing or potential customers go to Citi’s
Japanese consumer bank’s PC information site and fill in the form, provide the necessary credit
card details and validate it with 3 clicks of the mouse, they can join e-wallet.com. They can then
get the associated convenience and security of buying on-line through e-wallet from pre-selected
merchants. However, as yet Citi has not been able to move this product to the phone, since
security is lost and such payment methods in Japan are thus not yet possible by phone. Citi is
working with NTT and I-mode to resolve this security problem and related issues. However, all
these consumer banking and IT based strategies are centered on the customer to create multiple
access points for the customer and his or her Citibank relationship. In other words, Citi
recognizes that branches or ATMs will never disappear but that it should try to move as many
transactions as possible to electronics, provided the customer sees the shift positively as better
quality, more convenient and faster service. 20Success then becomes beneficially dynamic as
Citi‘s consumer banking managers in their data analysis will see the same complete customer
relationships as displayed to the CSR. This will create better customer understanding that results
20
Citi’s new shopping settlement system is another example of this multiple contact strategy combined with the bank’s desire to
use cell phones as a way to expand its retail payment services while still meeting its account security requirements. As reported
in the Japan Times, in May 2000 Citi has combined in Japan with Fujitsu and DDI to start a pilot service by the end of the year.
Similar to Citi-Wallet, the system works by registering clients’ credit card or bank account numbers with Citi in advance.
Customers can then order products anywhere anytime by number (a preset code for an item) through their Internet-capable
mobile phones. Citi then will manage the payment from the registered account. Customers can access the purchase codes through
the Internet, newspapers, or even a restaurant menu if they want to pay for a meal using their cell phones. As the program will be
an open standard, the companies are hoping to add others to the system over time, including other countries. Receiving goods at
home, office or convenience store can be chosen from a menu displayed on the phone. The system will also permit bank
51
in a better client interface, more targeted products and improved cross selling. In this way the
customer relationship is expanded, improving customer satisfaction, generating more revenues
and increasing the IT system user base.
The next generation mobile phone standard will certainly support this strategy as it is 16
times faster than ISDN. Therefore it will be a low cost wireless technology to send information
around the airwaves similar to what Citi has recently launched for laptops. The technology will
do this by sending packets of data. Citi will also be helped in this approach by advances in
battery technology that will give the cell phone both longer operating times between charges and
more power (Inui 2000). This means it can send educational information about products and
other types of alerts or notifications. The way the packets work from a security standpoint is that
data is sent in a jumble. Only a special decoder in the phone can reassemble the message
components and that decoder is keyed to the user. So if the user loses his or her phone, no one
else can access the data. It is like rebuilding a jigsaw puzzle where only the user knows the
solution. Citi believes this technical development will force all financial service providers to
rethink how they deliver content. It will also affect personnel training and how Citi creates
targets for the consumer banking group and CSRs.
For instance one area the Japanese e-Citi or cyber-marketing group is exploring is how to
reduce credit card disputes using the Internet. Generally if there is credit card issue the customer
now either goes to a branch or calls a CSR. Both procedures are quite expensive. Further, the
dispute can take two to three weeks to resolve, and it is a manual process; that is branch
personnel or the CSR have to enter the resolution into the computer. Both situations take
personnel time and are expensive. So if the e-Citi group could figure out a way to deliver this
transfers. The joint venture’s goal is 12 million customers by 2004, a substantial addition to Citi’s mineable Japanese consumer
base, in addition to a good test for expansion elsewhere.
52
service over the Internet and avoid the branch and the CSR, the consumer bank could save
millions of dollars. It would also add dramatically to the bank’s competitive advantage in credit
cards by improving and speeding customer service through better, faster resolution of these
disputes. This is a way of using IT to extend and enhance the delivery of an existing service
related to an important high profile product. A related problem is that these disputes normally do
not arise until a cardholder receives a monthly statement -- further delaying and complicating the
process. If customers could see what the CSR sees as soon as the disputed charge hits their
statement, it would speed complaints and problem resolution. Also, Citi would not be out as
many payments to merchants. This is an IT priority project.
The trick to using IT successfully and competitively to solve this sort of problem is to
know when there is need for human contact and when technology can be substituted. Balancing
these considerations is critical to competitive success. There is also the need to understand the
form that substitution should take, as well as how to sell it to the customer, such as Citi-Wallet.
The practical test as to whether this mix is working properly is if Citi is attracting customers to
these new products, and if they are profitable. By using focus groups, e-Citi is trying to develop a
life cycle marketing model that will help it anticipate and service needs as they develop. Clients’
product and service requirements are not static because their lives are changing and the available
products and technical delivery systems are changing. So the group has to appreciate the
products required in specific situations and how they may change over time.
Given this understanding, the group can then develop, adopt and put together the systems
to support and deliver those products and services, and integrate them into Citi’s total system
while meeting the necessary security requirements. One future example of this will be the
videophone that will emerge once bandwidth becomes big enough and can be delivered to the
53
cell phone consumer. At that time it may be possible to have a virtual cashier, where customers
can see the CSR and also see the screen at which the CSR is looking. This technical development
will open all sorts of possibilities in reducing branches and resolving credit card or other
situations speedily on-line. However, this is just another evolutionary extension of what Citi is
doing now by translating its database and managing access so customer account information and
services can be delivered quickly and securely via any device including interactive TV.21 The
objective is for its Japanese and other customers worldwide to be able to constantly,
continuously and consistently access Citi’s database in a secure manner for his or her
convenience. At the same time Citi’s service will recognize the device being used and will
deliver the appropriate visual module. Competitively this approach is already working.
21
Matsushita, Sony, and Toshiba have announced agreement on a standard for digital interactive TV that should be available in
Japan by the end of 2001 or sooner.
54
Trust Bank, Complementary Services, and Interactive Strategic Benefits
Citibank’s Japanese money and asset management business is administratively in its
Japanese Trust Bank, which is part of the global corporate bank rather than the global consumer
bank. The primary driver for this business emerges from Citibank’s worldwide assessment of
pension management needs by country in terms of requirements, available assets and shortfalls
(Krawcheck & Medler 1998). Since in Japan there is a large gap between pension requirements
and funding, and local competition is weak (Cai & Chan 1997), Citi feels there is a tremendous
opportunity for asset management services as higher returns will be required.22 At the same time,
it was Citi’s asset management capabilities that helped develop Citi’s important retail connection
with Japan’s Post Office. This is because both the Post Office and Citi knew defined contribution
plans were coming to Japan and the Postal Savings System wanted to be part of this
development, However it required the kind of funds management support and expertise that Citi
possesses.23
22
There is disagreement among experts as to why Japanese mutual fund performance is so poor. Brown et al (1998) believe it is
due to dilution created by new contributions based on per share NAV after allowing for accumulated taxes owed by current
participants. Cai and Chan (1997), though, believe there is little dilution, and that it is due to high stock purchase and
management fees combined with churning and lackluster portfolio management. But whoever is correct, there is no disputing the
poor returns even during the period of stock price growth from 1981 to 1992. Japanese mutual funds on average under-performed
the stock indices by at least 7-8% per annum. Thus, the perception is that local fund managers are weak and self-serving.
Therefore while Japanese mutual fund have seen outflows, foreign managed funds in Japan are growing (K&M 1998). Continued
0.5% to 1.0% returns on retail deposits should further this trend. CG is working to exploit this development by marketing wrap
accounts that include mutual funds through both Citibank-Japan and Nikko Salomon Smith Barney (Cerulli 1999). At the same
time, Bernstein Research (K & M 1998) projects a potential $24 trillion Japanese pension funding asset shortfall relative to future
requirements. This creates a tremendous opportunity for foreign fund managers over the coming decade as Japanese firms seek to
reduce the potential impact of unfunded pension liabilities on reported profits by improving returns on pension assets despite low
interest rates.
23
In August 1998, Salomon Smith Barney entered into a strategic alliance with Nikko Securities to provide investment banking,
sales & trading, and research services for corporate and institutional clients in Japan and overseas. The joint venture began
operating in the first quarter of 1999. CG’s Asset Management business is comprised of three platforms: Salomon Brothers,
Smith Barney and Citibank Global Asset Management. As of 12/31/98, total managed assets by these three organizations
exceeded $327 billion with about $100 billion each in the equity, fixed income and liquidity product categories. Approximately
$225 billion is managed in the U.S., $60 billion in Europe, $15 billion in Japan, $5 billion in Australia, $8 billion in Other Asia
Pacific, and $10 billion in Latin America. Further, in Japan Salomon and Smith Barney Asset Management combined in October
1999 to form SSB Citi to provide corporate and individual 401 (k) type plans. It expects to work with both the Post Office and
others in this area with record keeping done in conjunction with Japan Investor Solutions & Technologies and Nippon Record
Keeping System Co.
55
In addition to this critical synergy, there is currently also a direct connection between
Citi’s retail business and Citi’s global asset management business through the mutual funds that
Citi manages and sells to its Japanese customers. From its Japanese customers Citi has collected
$3 billion in mutual fund assets that are spread over 8 funds and are denominated in both dollars
and yen. These funds include a global fixed income fund and a domestic yen bond fund. The
Trust Bank also manages tailored portfolios for high net worth individuals and thus has a
connection to the Private Bank. So while the retail banking business in Japan is broken into
deposit accounts, loans, and credit cards, the consumer group is also targeting other consumer
business such as the sale of mutual funds as well as brokerage business through the Citigroup’s
relationship with Nikko Securities. Citi is also planning to extend its IT-based co-branding
expansion strategy through Nikko’s announced interest in Ito-Yokado’s proposed cyber-bank
(Hibara & Rapp 2000). This will be another way for the consumer bank to extend its product
delivery and credibility using IT just as it did with the Post Office. In addition it can now offer
service on a 24-hour basis in over 8000 locations rather than during the more limited hours that
the Post Office and its ATMs are available.
While these are contributions the corporate bank and its affiliates are making to Citi’s
retail strategy, there are also important contributions the consumer bank makes to the corporate
bank and to Travelers. These include contacts and links with the merchants where customers use
their credit cards. There is also foreign exchange, asset management, cash management, 401(k)
plans, payroll services, corporate cards (Diners), insurance products, private banking and
brokerage. Checking accounts, mutual funds, asset management, and private banking can all be
tied into this inter-related system. Economies of scale in asset management, mutual funds, and
401(k) type plans in terms of management, reporting and service give Citi an edge because it can
56
add a consumer component that is not available to providers who operate only on a business-tobusiness basis. A similar volume based benefit flows from the captive foreign exchange business
that comes from cardholders and related merchant payments. These payments help base load the
expensive trading and telecommunications support required for this 24-hour global business. The
consumer business with its global reach can also appeal and offer access to corporate executives
at different levels, including global professionals, normal business travelers, senior executives,
CEOs and owners. This offers the bank a customer spectrum to which it can globally market its
products and services from middle class to very wealthy individuals with the latter possibly
becoming clients of the Private Bank.
Summary - Owning the Future of International Retail Banking
Citibank’s strategic problem in the 1990s was how to grow the bank profitably in the face
of excessive competition in the U.S. and abroad in all aspects of financial services driven by
mega-mergers and deregulation within and across industry segments and geography. This was
especially true in U.S. consumer banking where super “Super-Regionals” and even national bank
chains were emerging through acquisitions that were increasingly questionable in terms of profits
and return on invested assets (Kover 2000). Citi’s solution to this strategic problem took three
forms. The first was to aggressively grow its international consumer franchise where it had
virtually no competition. The second was to develop and expand a set of products with national
and international marketing potential that were not branch intensive but were IT intensive, such
as credit cards, mortgages and Federally-insured student loans. The third was to expand this
strategy by merging with Travelers in a transaction that gave it an expanded range of products to
sell through its domestic and even more importantly its international outlets. The results have
been excellent in terms of increased revenue, cost savings, and a larger user base (Tables 1 and
57
3). But this outcome has also depended on a very effective integration of this three-pronged
business strategy with an equally effective and efficient IT support and rationalization strategy.
The reasons for this can be found in Hunter and Lafkas (1998) study on “Information
Technology, Work Practices, and Wages.”
As H&L explain there are two basic approaches to using IT in the workplace. One is to
automate existing practices to reduce the skills needed to perform a given task, “deskilling”. The
other is to enhance employees’ existing skills to extend their capabilities and make them more
productive, “upskilling”. Because H&L actually evaluated the performance of different U.S.
retail banks’ CSRs in terms of their IT support to see how these two alternative scenarios apply
in practice, their results are instructive. They are also directly applicable to Citi’s international
consumer banking experience.
This is because their conclusions indicate that IT systems that generate information as
opposed to just automating existing tasks tend to be “skill-biased” and support high involvement
or high performance work practices. These practices are “upskilling”, and such “upskilling”
usually improves existing skills, creates new skills, and leads to greater worker autonomy. In
turn, the IT system usually evolves and changes in tandem with the work practices so there is a
co-evolution of technology and work practices as has been demonstrated for Citi. Because such
development is based on the firm’s original choices, this view supports an evolutionary approach
to understanding Citi’s use of IT and how it is achieving best practice (Nelson & Winter 1982).
Furthermore, since upskilling is correlated with higher wages and strategic solutions as well as
greater employee retention, this approach is definitely preferable when possible.
Therefore H&L’s comments on cross selling and cross selling prompts by the IT system
are worth repeating here. “More extensive use of this software is consistent with … the potential
58
of technology to create new kinds of information and new ways of linking different sorts of data.
Such software can suggest sales opportunities to its users, provide information that enables users
to link together financial services that might have been previously unrelated, and can help the
service representative to engage the customer more fully in the sales and servicing processes.”
From this perspective, one can see Citi has definitely selected an upskilling approach in
developing its global retail financial services IT system and addressing its strategic problems.
This is apparent in its worldwide approach and more specifically, in its Japanese initiatives.
In the former initiative, its hard drive into international consumer banking was
encouraged by its long history overseas combined with the intense competitive pressures
domestically from Super Regionals and the emerging nationwide retail banks. In Japan, the
encouragement came from the synergies with its corporate lending and financial service
opportunities as well as the chance to take advantage of weakened Japanese competitors and the
Big Bang. Yet in both situations it had to develop a marketing approach that would both
differentiate it from other banks or financial service providers and be cost effective. Citi’s
strategy in this regard has emphasized its existing international presence and branch network
supported by a variety of sophisticated IT support and delivery systems for an expanding range
of services related to its understanding of its customers’ varying life cycle requirements by
country and market segment. This is because Citi envisions its customers as having an evolving
and growing set of financial needs that change systematically during their lives. When the
customers are young and starting to work, their needs are likely to be for credit and consumer
related finance. When they marry, they will need debt products such as mortgages for an
apartment that expands to a house and life insurance as they have children. Then there are
savings products for college, special events and retirement. These customer development
59
opportunities can then become intergenerational as children or even grandchildren develop their
financial requirements.
This strategy depends on three basic elements: Citi’s international infrastructure,
including branches and IT network; its life cycle marketing strategy; and management’s
evaluation of existing and potential customers’ patterns of personal development throughout
their lives and associated financial services based on extensive database management and
analysis. To accomplish its goals therefore, Citi systematically collects, manages and analyzes
the related data and then links the results of that assessment directly to its various IT delivery
systems. This strategy’s success thus depends on Citi’s timely marketing and delivery of these
products using IT and other means.
It must also assure that its product development evolves in a way that is responsive to
changes in its customers’ lifestyles as well as in the technology used to sell and deliver the
appropriate products and services. To address these and related strategic issues, Citi has
developed profiles identifying different customer groups and their financial needs according to
lifestyle, family size, etc., that is built into its software and that it constantly modifies based on
surveys, customer/CSR feedback and changes in available technology. In many cases it tries to
anticipate the interaction between its customers and potential technology changes. In both cases
it will cross match its survey results, database analysis and technological assessment with a
varying set of products, including new product offerings. In this way Citi is constantly offering
new and old customers products that are more focused on the customer’s changing financial
product and service needs. Furthermore, the mechanisms to deliver these are continually adapted
to changes in technology such as Internet related services.
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In addition, by getting the customer acquainted with Citi’s automated life style products
and account services at an early date and by constantly increasing the number, convenience and
quality of services and products, Citi hopes to improve customer contact, reduce customer
migration and keep costs low. By targeting and reinforcing the technical bias of younger
consumers, it is also using IT to influence customer behavior and expectations and tie them to
Citi on an interactive basis, since the competition looks less global, advanced and sophisticated.
Indeed, the global consumer bank seems to work hard at being good at this gathering and
managing of a wide range of information about its client base so it can offer products in a
personal and timely way while constantly improving the efficiency and user appeal of its
delivery systems. It also seems efficient at handling the technical complexities and developing
the supporting IT systems. This is important since often when there is conflict with employees in
goal setting, staff can sabotage the system and productivity improvements become limited. Citi’s
approach of making the consumer bank’s business units the promoters of IT system development
and evolution thus seems very practical. It also results in simpler, more easily understood and
measurable goals that are part of successful IT development and implementation.
As with other leaders in using IT, establishing beneficial IT loops with articulated goals
and outcomes appears to be part of Citi’s thought process. For example, in using IT to monitor
customer events and keep the information in service delivery loops, the consumer group or CSR
can solicit related business when a customer event occurs. As success is likely to be greater from
this kind of targeted marketing, it reinforces profits and acceptance of the system and life cycle
marketing by customers and employees. This builds the basis for Citi’s business success
including service and product diversification, thereby contributing to earnings. Given intense
competition in global financial services, such developments are critical to Citi’s competitive
61
position compared to other major financial institutions. Because in financial services customer
trust is the key to customer retention, stronger companies will always find it easier to retain
customer confidence in an uncertain environment and will benefit from flights to quality. This
consideration has helped Citi in Japan and in several emerging markets in Asia and Latin
America.
This service and perception advantage should be reinforced in the U.S. by the fact that
Citi’s approach to introducing automated delivery structures appears more customer oriented
than most U.S. banks, though over time Citi may arrive at a more automated system. Unlike the
situation noted by Harker (1997) for many U.S. banks, Citi has not tried to force customers who
may want something else to use a system just because it is cheaper and technically feasible, such
as charging a special fee for using a teller.24 Rather, Citi has developed and promoted IT that it
24
Professor Harker (1997) is leading a large research project on retail banking and software systems at Wharton. His research
results on the retail function at large U.S. commercial banks has demonstrated the need to align HR with strategy, but that most
US banks do not. For example, he explained that if a bank uses college graduates, it should expect inputs into the system from
which it will benefit. However, if a system is well established, and the bank does not expect employees to manage it, such as in
cross selling, then it should be less demanding of educational requirements, though this is not usually the case. Harker’s team
mapped IT and management process across parallel functions, such as opening an account, buying a CD, or changing an address
and found efficiency matters in terms of cost and customer perception. But this impact depends on who controls the system. If it
is the person adding value, the customer comes first; if it is the person managing MIS, then system cost per unit predominates.
The Citi approach is designed to have the former impact and its successful global consumer business is a result.
However, for firms in the best practice sample (Rapp 1999a), such as Citi, these two perceptions and functions are actually
integrated. System costs are balanced against customer value and revenues. Thus at Citi the product managers and consumer
bankers control the retail IT process through their budgets. To the extent this is not true for rivals, those firms will be at a
competitive disadvantage. Maintaining such a balance necessitates understanding how and why something is done. Harker has
indicated it is critical for firms to think about how and why they do things so they can understand the reasons why and can then
make rational choices concerning business systems. This is obvious from studying firms such as Citi since such understanding
allows the “best-practice firms” to make IT choices for rational explainable reasons. When this is not true for competitors, they
will suffer. Harker also pointed out that the best performers involve customers as part of the process, i.e. the total business
process. Simplistically, this means it does not pay to offer checking accounts if people only want money market accounts.
Therefore, if a bank wants customers to use a particular service delivery channel, the channel should be one that serves the
customer’s needs and interests. In fact what has happened in the U.S. is that as finance channels have expanded customers have
used the new channels but have not stopped using the old ones. So anticipated cost reductions have not occurred. However, Citi’s
approach recognizes this fact from the beginning, and the bank has only tried to make it easy and attractive for customers to use
the new channels more since even this changed behavior is cost saving. To achieve this result it has designed packages of
services and delivery systems through ATMs, branches, call centers, the Internet, and phones to reach a variety of targeted
customer segments. Further, Citi’s approach effectively maps revenue expectations currently and over the customer’s life cycle
against delivery cost and service expectations. This is a problem whose solution has eluded many U.S. banks as expansion via
acquisition has frequently not decreased costs and has not brought in additional customers or revenues (Kover 2000). Conversely,
Citi’s targeted market segmentation and cross selling approach has done this by working to match customer demands with a
dedicated “clicks and mortar” delivery system. In the new global retail financial services paradigm, automation clearly makes
sense even while U.S. banks concentrate on new products for revenue generation and on cash flow and balance sheet
management through securitization of consumer loans to boost return on equity. But to really gain the benefits of increasing
62
believes is demanded by the customer segments these systems are designed to serve, either
currently or over the customer’s life cycle. It has thus integrated the clients into its strategic
delivery system and has formalized this in its Direct Access program. In addition, its human
resource (HR) policies seem more aligned with this strategy than many U.S. counterparts in that
those segments that demand automation are getting it, while those that demand customer service
in terms of teller contact and cross selling are getting that.
It has also formed a special e-Citi cyber-banking group that is specifically charged with
achieving this strategic balance. Also, it has recognized that phone use defines customer
behavior and is thus going with the global flow towards mobile digital phones in its effort to get
customers to use more telephonic and automated delivery systems. This is particularly important
in reaching those who feel most comfortable with this medium, i.e. younger customers. In
essence Citi has found it easier to align its delivery and HR systems with its customers than
trying to get customers to align with a purely cost driven strategy. The former approach
considers the development of a life cycle customer and added revenues over time plus the cost of
customer replacement whereas the latter’s focus is short-term and leads to customer irritation.
returns, they need to expand their user bases. In the U.S. a merger is a one-time cost saving gain that does not add customers to
the combined entity. Conversely, the rapid expansion in the global economy and Citi’s unique position give it the chance to
capture the returns of an expanding user base continuously for several years. This is another reason why it will own the future in
international consumer banking.
In fact, this is why Citi is continually studying each segment or customer group to establish what each customer is looking for in
banking and other financial services. In turn, it closely monitors these groups and keeps information in service delivery loops so
when an event is coming, it can solicit the related business on a targeted basis, e.g. college loans when child gets to be that age.
This matching of services with customer profiles is built into the life cycle concept, while mailings, mobile phone messages and
other direct marketing efforts are more specific to a customer’s needs and thus have a greater chance of success than the
generalized shotgun approach used by most U.S. banks. Further, being able to do this efficiently and know the revenues
generated by a new marketing effort will cover the cash outflow is important in an environment where credit card loans are being
written off or restructured so their balance sheet contribution to cash flow is deteriorating. Thus from a long-term perspective, a
bank needs a strategic mix of operating efficiency and balance sheet risk management efficiency. Citi is using IT to help it
manage both these important aspects of its global consumer business. In essence, integrated service delivery is only viable if the
information delivery needed to support that service and related products is also integrated and is strategically aligned with the
bank’s business goals and objectives, including the balance between credit risk, revenue expansion and cost reduction. Consistent
with this dictum, Citi adds functions over time to the basic automated delivery structure as this is technically feasible and is
demanded by the customer segments these systems are designed to serve, either currently or over customers’ life cycles. This is
why Citi is very customer oriented in terms of its IT strategy because the customer is integrated into its strategic delivery system
including aligning its HR policies. This is all a function of Citi’s global retail banking strategy and its implementation.
63
From a strategic perspective, the former should be more user-friendly, successful and
profitable over time. Thus, Citi’s global retail banking division has used IT to control and
support every aspect of its business from development to delivery to after-sales service and
support since management views this as literally a life-long relationship. They also want the
customer to see it this way. Therefore, Citi is using IT to impact its competitive environment by
changing the way customers look at their financial service requirements and what they expect
from a provider given these new perceptions. This seems the beginning of “Controlled
Production” where CG is using IT to control all aspects of its business and to directly influence
the external environment. Its continued success in this interactive process should reinforce the
customer’s perception of Citi as among the world’s top financial organizations and the continued
leader in international consumer banking.25 This has all the elements of a beneficial loop.
25
In the Fall of 1998, Bernstein Research (K&M 1998) predicted Citi would have “greatest global growth potential dude to its
multitude of customer points and product range,” a prediction confirmed by Fortune in May 2000 (Kover 2000).
64
APPENDIX I
Summary Answers to Questions for Citigroup – International Consumer Banking Strategy
& Operations
General Management and Corporate Strategy
Yes
Has the firm integrated IT into their management and production
strategy, including using it to institutionalize organizational strengths
and capture tacit knowledge on an iterative basis?
x
Has the firm succeeded solely on the basis of its software strategy?
Does the firm believe some customized IT and its close
organizational integration enables it to capture and perpetuate on a
more consistent basis tacit knowledge and unique corporate features,
i.e. core competencies, that account for its continued success in the
market with reliability and repetition important elements in its
thinking?
x
x
Is firm’s IT strategy successful because it is well managed and
x
introduces IT innovation when it serves corporate goals for enhancing
productivity or customer relations within its industry?
Does consumer banking division generally meet established criteria
as a quality organization such as: effective organizational self
assessment, use of project and cross functional teams, improving
quality outcomes through reducing uncertainty, rapidly diffusing
learning throughout the organization including using IT, effective
implementation of organizational and technical change, facilitating
change via evolution rather than revolution or reengineering26,
emphasizing participatory management, having process excellence,
using value added analysis, actively doing benchmarking, constant
organizational improvement, commitment to concrete realistic goals,
effectively managing a dynamic iterative experimental process
through goal setting, training and constant consultation?
Does the firm plan in detail for operational excellence including the
contribution of IT to the allocation of resources?
Do planning systems enable management to make better business,
operating and resource allocation decisions, including IT?
26
x
x
x
MIT Systems Dynamics Group in 9/97 presentation estimated 70% of reengineering efforts fail.
65
No
Do projects focus on a small number of IT goals, usually three or
fewer, with a well-defined system reaching from the commitment of
senior management to the department level with associated metrics?
x, Focus
Is the firm a “high performance” workplace for services?
?
Is there a heavy emphasis on improving process through IT?
x
revenue &
profit
Industry Related
Are industry economics & competition important strategic drivers for
firm’s IT use in that IT is adapted to its competitive situation?
x
Are there industry paradoxes such as: falling stock prices, production
improvements that create product improvement difficulties, or
employees’ active product use that retards improvements?
x
Competition
Is IT a significant and successful input into the firm’s competitive
performance?
x
Does the firm explicitly and consciously perceive implications of IT
strategies and use on its competitiveness and business success?
x
Are there direct links between IT strategies and overall management
goals?
x
Do customers, affiliates, competitors, industry analysts, government
officials, industry associations and suppliers perceive the competitive
benefits or impact of the firm’s use of IT?
x
Has the firm gained first mover advantages through successfully
introducing software-related innovations?
x, Direct
Access &
m-phone
IT Strategy
Is the firm a sophisticated software user that consciously designs and
implements an IT strategy to achieve competitive advantage?
Does the firm combine several types of IT to achieve an advantage?
27
x
x
Easton, G. S. and S. L. Jarrell, “Using Strategic Quality Planning More Effectively: Lessons Learned from NSF Project
Research,” Columbia Business School conference presentation, September 1997
66
Does firm’s system work to rapidly uncover implementation barriers,
including using new or better IT, while generating cross-functional
and hierarchical consensus so measured goals are achieved?
Is leadership at different levels actively involved in IT planning,
assessment and deployment with regular progress reviews that link
plans, goals, metrics, milestones, resources and responsibilities?
x, culture,
LA office,
unit P&L
x, varies
project
Does the system allow for flexibility and innovation plus change and
individual efforts if goals, planning and metric criteria are met?
x
Is there a clear vision making project and new software selection
straightforward and closely related to strategic goals and processes?
x, unit
Does the firm’s IT strategy involve conscious clearly defined reliance
on customized and semi-customized software in addition to packaged
software with specific criteria and goals for selecting each type, and
does it have ways to measure this so the firm knows customized
software achieves functional or market gains that justify the added
expense, including related costs of integrating customized and noncustomized software into a single information system?
Does the firm use option valuation methods to manage uncertain
random outcomes, since this approach even among very well
managed companies is at IT implementation frontiers?27
P&L
x
x, the cost
of customer
loss
Does strategy include more use, development and integration of
industry and company-specific vertical application IT and embedded
SW in production & delivery processes to improve competitiveness?
x Citi Hub
If the firm has embedded software strategy, is it integrated or
interactive with other IT and overall business strategy in ways
affecting delivery, product design or service that improve quality and
costs long term?
x, Direct
Access
x, case by
Do they favor increased outsourcing of software design and
development?
67
case
Does the firm believe large-scale outsourcing by many U.S.
companies assumes those firms’ IT systems development need not be
integrated with their business organization and that they view their IT
systems as generic products best developed by outside vendors who
can achieve low cost through economies of scale? That is, do they
feel these firms’ approach focuses on software costs and such firms
do not see differences in systems used by competitors?
?, Own IT
Does it believe this is a mistake by competitors that gives it a longterm and sustainable advantage over such companies because it
believes outsourcing surrenders firm’s strategic IT options as systems
service companies tend to develop increasingly standardized products
one step removed from company’s customers and business?
x, believes
Has the firm established a software strategy that is open and
interactive with its customers and/or suppliers?
Has this enabled it to capture information or cost competitive
externalities?
integrated,
but no
specific
comment
own IT a
benefit
x, takes
positions,
e.g. 724
x, purpose
investments
IT Operations
Do participants own goals and are then committed to implementation
strategies?
x, unit
Does the firm embed software into its production and delivery
processes with competitive market implications?
x, Direct
Is IT technology tied to high speed telecommunications technology,
allowing the firm to track, receive and deliver shipments or services
directly or on-line without further handling or processing?
x, internal
Does it manage potential risks in extensive IT use or open systems?
x, security
Do they work to ensure consistency and reduce programming errors?
x, LA task
Is informal interaction a key aspect of planning and implementation?
x
Is the firm’s IT system institutionalized and self-reinforcing with
good communication and consensus building while IT plays a role,
including preventing retrospective goals or target reduction?
x, unit
68
P&Ls
Access
links
emphasis
P&Ls, note
results
Human Resource and Organizational Issues
Does the firm pay close attention to systems training and
organizational integration for all employees, reducing errors through
improved consistency and staffing efficiencies across the firm since
software can confound even routine operations?
x
x, CSR
Does certain software require special HR competencies or education?
training
x
Does the firm try to change human behavior to use software?
Parameter Metrics - Inventory, Cycle Times and Cost Reduction
Are goals linked to regularly reviewed metrics with inputs coming
from all levels that are often cross-functional affecting large parts of
the company: cycle times, timely delivery, and customer satisfaction?
x, Direct
Access,
unit P&Ls
Does the firm have standard agreed ways to explicitly organize or
manage this IT selection process?
x, consult
Does the firm have agreed ways to measure and evaluate success in
using software to promote objectives such as lower costs, contract
time, market share, product development times, or system support?
x, unit
Are IT costs balanced against overall long-term productivity or
revenue gains?
x, unit
Does the firm have methods to ensure increased customization costs
result in lower costs downstream so developing and using customized
software makes sense?
x, unit
Has the firm created large interactive databases to allow automatic
feedback between stages or players in the production and delivery
process? And are these databases constantly being refined and
updated on an interactive basis with actual performance results in a
real time global environment?
LA
P&LS
P&L, Life
cycle view
P&L, Life
cycle view
x,
customer
data mining
x, unit
Are there competitive and metric impacts such as reducing inventory
costs and wastage while improving the quality of customer service?
P&L, CSR
call time
Has the firm used IT to create beneficial feedback cycles that increase x, CSR
integrated
productivity, reduce cycle times and errors, and integrate product and screen
delivery?
69
Do other firms or analysts have alternative measures of
competitiveness or views on the appropriate industry strategy?
Has the firm achieved better than industry growth, superior delivery,
improved control, reduced down-time or changeover problems,
reduced product or process errors, fewer complaints, an improved
product development process, and/or any other definite and
measurable progress relative to competitors?
Not
noted
x
Do the firm’s metrics go beyond financial to areas like customer
satisfaction, operational performance, and human resources?
x
Does their evaluation system apply to new product development and
significant projects as well as to continuous operations?
x, unit
70
P&L screen
Summary and Conclusions
Conclusions and Results
Can you summarize mission statement on the role and impact of IT as a x stated
tool of competitive advantage for this firm in this industry?
vision
Is it consistent with strategies identified as successful or appropriate in
competitiveness research from Sloan’s industry study center?
x, Harker,
H&L
Are there important business or IT situations requiring further research? follow-up
Are intellectual property issues important in explaining firm’s
successful and sustainable use of IT to achieve competitive advantage?
Are beneficial cost impacts generally an important consequence of this
firm’s successful software strategy?
Does this company fit a profile where IT seems most likely to
contribute to enhanced competitiveness?
Based on this study is the market for vertical application and embedded
software growing?
x, IT firm
investment
x
x
x
Would
n’t re
Citi
Since Japanese competitors normally do not outsource, do Japanese
firms see themselves as benefiting from this U.S. trend?
Does this leading U.S. firm assign positive value to improved
integration and enhanced control through selective customization?
x
Do general measures such as decreased costs, as evidenced by reduced
account servicing expenses, reflect benefits of a successful IT strategy?
x
Are the benefits of a successful software strategy also reflected in
specific industry standards such as an expanded customer base?
intent cross
sales
Does this leading IT user have explicit criteria for selecting package
versus customized software and for semi-customizing IT packages?
x, user
P&L, IT
function
Does this firm closely integrate or couple its IT and business strategies
beyond mere alignment?
x, integral
Does it closely integrate its organizational and HR policies with its IT
systems?
Have they reorganized to use software and information technology?
71
x
x , e-Citi,
cybermarketing
Has IT codified or built on existing organizational strengths or core
competencies, including HR alignment with business and IT strategies?
x, int’l base
x, integral
Have they embraced and integrated IT as part of their business
strategies and core competencies?
Is MIS function integrated with the rest of consumer bank in terms of
organization and decision making?
72
x, e-Citi,
cybermarketing
APPENDIX II - SOME BUSINESS AND FIRM RELATED DATA
Table 1 – Citicorp Financial Highlights 1998-99
Citigroup Segment Income ($ millions)
1999
1998
% Change
Global Consumer - Banking/Lending
$2,209
1,349
64
Insurance (A)
1,354
1,212
12
Total North America
3,563
2,561
39
International
998
768
30
Other Global Consumer (B)
(265)
(218)
(22)
TOTAL GLOBAL CONSUMER
4,296
3,111
38
Global Corporate and Investment Bank
Salomon Smith Barney
2,354
408
477
Emerging Markets
1,190
748
59
Global Relationship Banking
686
490
40
Commercial Lines Insurance (A)
845
723
17
Total Global Corporate and Investment Bank
5,075
2,369
114
Global Investment Management and Private Banking
SSB Citi Asset Management Group
324
256
27
Citibank Private Bank
278
251
11
Total Global Investment Management and
602
507
19
Private Banking
Corporate/Other
(686)
(478)
(44)
Investment Activities (C)
660
833
(21)
Core Income
9,947
6,342
57
Restructuring-related items and
47
(535)
NM
merger-related costs, after-tax (D)
Cumulative effect of accounting changes (E)
(127)
—
—
Net Income
9,867
5,807
70
Source: Citicorp 2000; (A) Personal & Commercial Line Insurance in aggregate represent
Citigroup’s share of Travelers’ results. (B) Includes results of e-Citi and other consumer
activities. (C) Includes Company’s venture capital activities. (D) For 1999, includes restructuring
charges of $82 million, $113 million of accelerated depreciation, and credits of $242 million for
reductions of prior years’ charges. For 1998, includes restructuring charges of $703 million,
merger-related costs of $65 million, and credits of $233 million for reductions of 1997
restructuring charges. (E) Refers to adoption of Statement on “Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments” of ($135) million; “Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk” of
$23 million; and “Reporting on the Costs of Start-Up Activities” of ($15) million. NM - Not
Meaningful.
73
Table 2 Five-year Summary of Citigroup Selected Financial Data 1994-98 (1)
(Consolidated $ billions)/Year
1998
1997
1996
Total revenues
$76.4 72.3 65.1
Total revenues, net of interest expense
48.9 47.8 43.8
Provisions benefits, claims, & credit losses 11.1 9.9
9.6
Operating expenses (2)
28.6 27.1 23.5
Income from continuing operations (2)
5.8 6.7
7.1
Discontinued operations
— —
(0.3)
Net income
5.8 6.7
6.7
Total assets at 12/31/99
668.6 697.4 626.9
Total deposits
228.6 199.1 185.0
Long-term debt
48.7 47.4 43.2
Mandatory redeemable securities
4.3, 1.0
2.5
Redeemable preferred stock
0.1 0.3
0.4
Total stockholders’ equity *
42.8 41.9 38.5
Earnings to fixed charges, preferred dividends 1.32x 1.41 1.48
Return stockholders’ equity (3) (%)
13.95% 17.49 19.42
Stockholders’ equity to assets (%) *
6.39% 6.00 6.13
Income Analysis (4)
Total revenues, net of interest expense
48.9 47.8 43.8
Effect credit card securitization activity (5)
2.2 1.7
1.4
Adjusted revenues, net of interest expense
51.1 49.5 45.1
Adjusted operating expenses (6)
27.8 25.5 23.5
Acquisition-related costs
— — (0.5)
Adjusted provision benefits, claims, credit (7) 13.3 11.5 10.3
Restructuring charges and merger-related costs (0.8) (1.7) —
Acquisition-related costs
—
— (0.7)
Operating loss from discontinued operations
— —
0.1
Income before taxes and minority interest
9.3 10.8 11.1
Provision for income taxes
3.3 3.8
4.0
Income from continuing operations
5.8 6.7
Discontinued operations, net of tax
— — (0.3)
1995
1994
59.0
36.6
7.2
20.5
5.6
0.2
5.8
559.1
167.1
40.7
—
0.6
35.2
1.35
18.88
6.29
54.4
31.8
7.3
19.2
4.2
0.2
4.5
537.5
155.7
40.2
—
0.7
29.9
1.21
16.56
5.57
36.6 31.8
0.9
0.9
37.5 32.8
20.6 19.1
—
—
8.0
8.3
—
—
—
—
—
—
8.9
5.7
3.3
1.5
7.1
5.6
0.2
0.2
4.2
Source: Citigroup 1999
* Total capital (Tier 1 and Tier 2) was $55.0 billion or 11.43% of net risk-adjusted assets, and Tier 1 capital was
$41.8 billion or 8.68% at 12/31/98.
(1) All periods have been restated to reflect Travelers and Citi merger 10/8/98 and Salomon Inc 11/28/97. Results of
property casualty business Aetna P&C are included from acquisition, 4/2/96. (2) Years ended 12/31/98 and 1997
include net restructuring charges (in 1998 merger-related costs) of $795 million ($535 million after-tax) and $1,718
74
million ($1,046 million after-tax). (3) Return on stockholders’ equity is calculated using net income after preferred
stock dividend and excluding gains and losses on discontinued operations. (4) The income analysis reconciles
amounts shown in the Consolidated Statement of Income to the basis employed by management for assessing
financial results. (5) Commencing in 1997 this includes effect related to credit card receivables held for sale. (6)
Excludes restructuring charges and net OREO benefits, and in 1996, operating loss from discontinued operations
and acquisition-related costs. (7) Includes a provision in excess of net credit losses to increase the allowance for
credit losses by $107 million, $128 million, $242 million, $309 million, and $751 million for 1998, 1997, 1996,
1995 and 1994 respectively.
Table 3 Citigroup’s Business Income (loss) for Each Main Business Segment 1996-98
($ Millions)/Years
Global Consumer
Citibank North America
1998
1997
$ 113
71
(12)
Mortgage Banking
175
117
64
Cards
737
523
713
Consumer Finance Services
264
213
199
1,289
924
964
Travelers Life & Annuity
496
424
360
Primerica Financial Services
400
335
273
Personal Lines
319
300
193
Banking/Lending
Insurance
Total North America
1996
1,215
2,504
1,059
1,983
826
1,790
Europe, Middle East, & Africa
155
138
190
Asia Pacific
410
428
496
Latin America
163
273
281
Global Private Bank
254
281
231
982
1,120
1,198
Total International
e-Citi
(142)
(79)
(51)
Other
(86)
24
46
3,258
3,048
2,983
1998
408
1997
1,438
1996
1,638
Emerging Markets
690
909
1,000
Global Relationship Banking
220
559
510
Total Global Consumer
Global Corporate and Investment Bank
($ Millions)/Years
Salomon Smith Barney
75
($ Millions)/Years
Commercial Lines Insurance
Total Global Corporate & Investment
Asset Management
Corporate/Other
Business Income
Investment Activities
Core Income
1998
1997
1996
723
632
499
2,041
3,538
3,647
273
243
208
(159)
(370)
(451)
5,413
6,459
6,387
929
1,292
594
6,342
7,751
6,981
(1,046)
—
Restructuring charges, merger-related costs (535)
Gain sale stock by subsidiary
—
—
363
Acquisition-related costs
—
—
(346)
Loss on disposition of subsidiary
—
—
(259)
6,705
6,739
Net Income
5,807
Table 4 Diffusion Cellular Phone Service Various Countries (% Total Population) 1999
Country
Finland
Sweden
Italy
Taiwan
Holland
Japan
Australia
66.3
59.5
56.6
52.6
46.0
42.6
40.3
Norway
Denmark
Hong Kong
Korea
Switzerland
Singapore
Greece
63.6
58.0
56.5
51.4
45.7
42.0
40.0
Source: Nikko Salomon Smith Barney Ltd.
76
Iceland
Austria
Luxembourg
Portugal
U.K.
Spain
62.9
56.8
52.8
49.1
44.4
40.8
Table 5 GLOBAL CONSUMER Bank in Detail 1996-98
$ Millions/Year
1998
Total revenues, net of interest expense
$23,743
Effect of credit card securitization activity
2,187
Net cost to carry cash-basis loans and OREO
(17)
Adjusted revenues
25,913
Total operating expenses
12,423
Restructuring charges
(706)
Adjusted operating expenses
11,721
Operating margin
14,192
Effect of credit card securitization activity
2,187
Adjusted provisions benefits, claims, credit 9,134
Business income
3,258
Restructuring charges, after-tax
446
Net income
2,812
BANKING/LENDING
Citibanking North America
Total revenues, net of interest expense
1,989
Adjusted operating expenses
1,705
Operating margin
284
Credit costs
111
Business income (loss) before taxes
173
Net income (loss)
24
Average assets (in billions of dollars)
12
Return on assets
0.94%
Mortgage revenues, net interest expense
$558
Adjusted operating expenses (1)
243
Operating margin
315
Credit costs (2)
20
Business income before taxes
290
Net income
169
Average assets (in billions of dollars)
$25
Return on assets (%)
0.68%
Accounts (#in millions) (1)
2.8
Average loans ($ billions) (1)
$23.9
Mortgage originations ($ billions)
16.1
1997
20,992
1,713
(2)
22,703
10,678
(580)
10,102
12,601
1,713
8,021
3,048
351
2,697
1,875
1,611
264
131
133
(53)
11
0.65%
519
234
285
87
198
105
24
0.44
2.5
22.3
8.2
1996
19,513
1,392
(10)
20,895
9,183
—
9,178
11,717
1,392
7,305
2,983
—
3,009
1,619
1,507
112
140
(28)
(12)
12
NM
458
219
239
134
105
64
22
0.29
2.2
20.8
5.3
(1) Includes student loans. (2) Represents provision for credit losses (on a managed basis).
77
Card (Table 5 – Global Consumer in detail continued)
$ Millions/Year
1998
1997
Total revenues, net of interest expense
$4,921
3,717
Effect of credit card securitization activity
2,187
1,713
Adjusted revenues
7,108
5,430
Adjusted operating expenses (1)
2,692
1,832
Operating margin
4,416
3,598
Adjusted credit costs (2)
3,253
2,808
Business income before taxes
1,163
790
Net income
698
487
Average assets (billions of dollars)
$28
25
Return on assets (3) (%)
2.63%
2.09
Accounts (in millions)
41 (58% increase over 1997)
Cards in force (in millions)
69 (68% increase over 1997)
Charge volumes ($ billions)
$140.6 (32% increase over 1997)
End-of-period receivables ($ billions)
69.6 (40% increase over 1997)
1996
3,848
1,392
5,240
1,737
3,503
2,407
1,096
713
21
3.40
(1) Excludes restructuring charges. (2) Provision credit losses. (3) Adjusted effect credit card securitization, return
on managed assets for Cards was 1.13% in 1998, 0.97% in 1997, and 1.51% in 1996.
Consumer Finance Services
Total revenues, net of interest expense
Adjusted operating expenses (1)
Operating margin
Credit costs (2)
Business income before taxes
Net income
Average assets (billions of dollars)
Return on assets (1) (%)
$1,338
504
834
419
415
263
$12
2.20%
1,067
422
645
316
329
213
9
2.37
917
316
601
296
305
199
8
2.49
(1) Excludes restructuring charges. (2) Represents provision for credit losses.
e-CITI
Total revenues, net of interest expense
Adjusted operating expenses (1)
Operating margin
Credit costs
Business loss before taxes
Net loss
$147
379
(232)
3
(235)
(144)
78
112
239
(127)
4
(131)
(95)
88
163
(75)
5
(80)
(51)
INSURANCE (Table 5 – Global Consumer in detail continued)
Travelers Life and Annuity
$ Millions/Year
1998
Total revenues, net of interest expense
$3,006
Policyholder claims and benefits
1,871
Adjusted operating expenses
376
Business income before taxes
759
Net income
488
Net premiums and deposits by product
Deferred annuities
Fixed
774
Variable
2,651
Payout annuities
429
GIC and other annuities
3,690
Individual life insurance
Direct periodic premiums, deposits
322
Single premium deposits
85
Reinsurance
(66)
Individual long-term care insurance
213
Total T, L & A
8,098
Primerica Financial Services
Total revenues, net of interest expense
$1,654
Policyholder claims and benefits
484
Adjusted operating expenses
546
Business income before taxes
624
Net income
398
Personal Lines
Total revenues, net of interest expense
$3,666
Operating expenses
930
Claims and claim adjustment expenses
2,181
Business income before taxes, minority interest 555
Net income
319
Net Written Premiums by Product Line for 1996-98
Personal automobile
$2,328
Homeowners and other
1,162
Total Premiums
3,490
79
1997
2,670
1,677
348
645
424
1996
2,322
1,474
297
551
360
779
1,775
310
2,109
621
1,370
142
1,100
290
56
(58)
184
5,445
286
59
(53)
128
3,653
1,522
497
502
523
335
1,415
528
460
427
273
3,276
884
1,853
539
300
2,658
665
1,660
333
219
1,950
1,124
3,074
1,645
714
2,359
Europe, Middle East, & Africa (Table 5 – Global Consumer in detail continued)
$ Millions/Year
Total revenues, net of interest expense
Adjusted operating expenses (1)
Operating margin
Credit costs (2)
Business income before taxes
Income taxes
Business income
Restructuring charges, after-tax
Net income
Average assets (in billions of dollars)
Return on assets
(%)
Accounts (in millions)
Average customer deposits
Average loans
1998
$1,954
1,346
608
292
316
161
155
125
30
21
0.14%
9.5
$16.7
15.8
1997
1,864
1,323
541
274
267
129
138
65
73
21
0.35
8.9
16.8
15.1
1996
1,989
1,368
621
303
318
128
190
—
190
24
0.79
8.6
18.0
17.3
$1,773
968
805
251
554
144
410
64
346
28
1.24%
7.4
$36.1
20.2
1,799
1,024
775
201
574
146
428
60
368
28
1.31
6.2
30.5
20.8
1,838
977
861
167
694
198
496
—
496
25
1.98
5.5
28.2
19.6
Asia Pacific
Total revenues, net of interest expense
Adjusted operating expenses (1)
Operating margin
Credit costs (2)
Business income before taxes
Income taxes
Business income
Restructuring charges, after-tax
Net income
Average assets (in billions of dollars)
Return on assets
(%)
Accounts (in millions)
Average customer deposits ($ billions)
Average loans
80
Latin America (Table 5 – Global Consumer in detail continued)
$ Millions/Year
Total revenues, net of interest expense
Adjusted operating expenses (1)
Operating margin
Credit costs (2)
Business income before taxes
Net income
Average assets (in billions of dollars)
Return assets (1)
(%)
Accounts (in millions)
Average customer deposits
Average loans
1998
$1,562
1,071
491
265
226
96
$12
1.36%
6.7
$10.2
7.8
1997
1,446
923
523
192
331
253
8
3.41
4.9
8.2
6.6
1996
1,304
790
514
192
322
281
7
4.01
4.2
7.8
5.4
Global Private Bank
Adjusted revenues
Adjusted operating expenses (1)
Operating margin
Adjusted credit benefits (2)
Business income before taxes
Net income
Average assets (in billions of dollars)
Return on assets (1)
$1,061
725
336
(16)
352
211
$17
1.49%
1,018
670
348
(19)
367
263
17
1.65
929
637
292
(1)
293
231
16
1.44
Other Consumer
Total revenues, net of interest expense
Operating expenses
Business income (loss) before taxes
Income taxes (benefits)
Net income (loss)
$ 97
236
(139)
(53)
(86)
105
90
15
(9)
24
118
42
76
30
46
2,808
2.35
2,319
1.93
(1) Excludes restructuring. (2) Provision credit losses.
Global Consumer Allowance Credit Losses
Allowance for credit losses
$3,310
As a percentage of total loans (%)
2.50%
81
Table 6 Net Consumer Related Credit Losses and Ratios (1)
Loan ($ billions)
Average
Total 90 Days + Past Due Loans Net Losses
Year/Loan Losses ($ billions)
1998 1998 1997 1996
1998 1998 1997 1996
Citibanking North America
$ 8.4 0.09 0.14 0.23
8.3 0.12 0.14 0.15
Ratio (%)
1.04 1.61 2.50
1.49 1.61 1.72
Mortgage Banking
25.6 0.63 0.72 0.90
24.0 0.08 0.12 0.13
Ratio (%)
2.44 3.13 4.32
0.31 0.51 0.64
U.S. Bankcards (2)
69.1 1.00 0.87 0.90
58.6 3.12 2.66 2.17
Ratio
(%)
1.45% 1.77 1.89
5.33 5.74 4.95
Other Cards
2.3 0.05 0.04 0.04
2.3 0.07 0.06 0.06
Ratio (%)
1.96% 1.72 1.76
2.91 2.86 2.86
Consumer Finance Services
11.9 0.17 0.13 0.09 10.6 0.29 0.23 0.21
Ratio (%)
1.44% 1.36 1.33
2.74 2.82 3.14
Europe, Middle East, & Africa
17.1 0.94 0.91 0.96
15.8 0.27 0.27 0.29
Ratio
5.49% 6.00 5.91
1.71 1.77 1.68
Asia Pacific
21.8 0.50 0.26 0.26
20.2 0.23 0.17 0.16
Ratio
2.28% 1.34 1.23
1.12 0.82 0.81
Latin America
8.0 0.29 0.17 0.12
7.8 0.24 0.18 0.19
Ratio
3.60% 2.34 2.05
3.07 2.66 3.44
Global Private Bank
17.0 0.19 0.11 0.19
15.9 0.01 (0.01) NM
Ratio
1.14% 0.72 1.26
0.03 NM 0.02
e-Citi
0.4 0.002 0.001 10.3
0.003 0.004 0.01
Ratio
0.35% 0.60 0.56
1.15 1.93 2.95
Total managed
181.6 3.85 3.34 3.69 163.8 4.43 3.81 3.36
Ratio
2.12% 2.23 2.54
2.70 2.61 2.41
Securitized credit card receivables
(44.3) (0.66) (0.48)(0.50) (36.5)(2.05)(1.59)(1.39)
Loans held for sale (3)
(5.0) (0.04) (0.04) —
(4.6)(0.13)(0.13) —
Total loans
$132.3 3.15 2.83 3.19 122.7 2.24 2.10 1.97
Ratio
2.38% 2.36 2.66
1.82 1.79 1.74
Source: Citigroup (1999)
(1) Ratios 90 days or more past due and net credit losses are calculated based on end-of-period and average loans,
respectively. (2) Includes U.S. Bankcards and Travelers Bank. U.S. Bankcards managed ratios of 90 days or more
past due. Net credit losses were reduced by 10 and 20 basis points respectively in 1998 due to acquisition of
Universal Card portfolio. (3) Commencing in 1997, Citigroup classified credit card and mortgage loans intended for
sale as loans held for sale and recorded at lower of cost or market. Net credit losses are charged to other income.
Consumer loans include loans managed by Global Consumer. These are written off not later than a fixed number of
days past due on a contractual basis, or earlier in the event of bankruptcy. Citi fixes the number of days by loan
product and country segment. It collectively evaluates each segment for credit losses based upon historical loss
experience, adjusted for changes in conditions.
82
Highlights from Citi’s Assessment of Global Consumer Business 1999 and 1998
The performance of Citi’s Consumer Related businesses as presented in its Annual Reports (Citigroup 2000
and 1999) demonstrates the importance of consumer financial services including cards, mortgages, loans,
insurance products and asset management to Citi’s growth in earnings and as offset to more volatile
corporate activities. Also, in 1999 Citigroup saw its leadership in consumer banking as beginning to transform
consumers’ expectations about financial services based on its stated strategy of combining product range with the
ease of use. The intent is to offer all the products and services individuals and families need at every stage of their
financial lives, from student loans to automobile insurance to mortgages to retirement planning. Clients gain access
to products and services through a single relationship that can be located anywhere in the company. They can choose
a gateway to Citigroup from the widest range of possibilities in the industry. At the end of 1999 there were 1,400
Citibank branches and 3,800 Citibank ATMs worldwide, 1,200 Citi-Financial offices in the United States and
Canada, and additional Citigroup-owned consumer finance offices worldwide. Also it had 97 million credit and
charge cards outstanding, and Primerica’s direct sales force was more than 100,000. In addition, there were the
9,000 independent agents of Travelers Life & Annuity and the 5,400 independent agencies of Travelers Property
Casualty in North America. Some of its consumer products also were offered through 11,300 financial consultants in
Salomon Smith Barney’s Private Client Division in the United States and in Citibank Private Bank offices in 31
countries and territories. In addition to these traditional gateways, it provided “Internet touch points,” that included
on-line banking in 19 countries and territories. These are full-service virtual banks that allow comprehensive
banking and investment activities, including securities trading.
While its marketing strategy encompasses all consumers, including those who have attained wealth and those who
are beginning to acquire assets it is particularly focused on the broad middle-income individuals and their families.
Expanded investment services available through Citibanking and Primerica in 1999 included the sale of more than
$1.8 billion in mutual funds from SSB Citi Asset Management Group in the U.S., and more than $4 billion
internationally. Citicorp Mortgage provided Salomon Smith Barney Private Client Division customers with more
than $675 million in customized mortgages. Citi-Financial extended $2 billion in home-equity and debtconsolidation loans to Primerica customers and Citibank credit card holders in North America. More than 15,000
Travelers Property Casualty policies were underwritten for Citibank card customers. Customers of Citibank,
Primerica and SSB Private Client Division purchased more than $2.8 billion in products from Travelers Life &
Annuity. More than 15,000 Travelers Property Casualty policies were underwritten for Citibank card customers.
Customers of Citibank, Primerica and SSB Private Client Division purchased more than $2.8 billion in products
from Travelers Life & Annuity.
In 1998 CG core income was impacted by economic turmoil in Russia and Asia. Corporate and Investment Bank
income decreased 42% to $2.041 billion and decreased 28% in Investment Activities to $929 million. Partly
offsetting this was a 7% increase in Global Consumer to $3.3 billion, complemented by a 12% increase in Citi
Asset Management’s core income to $273 million. The $770 million increase in 1997 core income compared to
1996 primarily reflected strong performance in Investment Activities and the Global Consumer Insurance business,
up $698 million and $233 million, respectively, partially offset by a $200 million decline in Salomon Smith Barney.
More specifically Global Consumer’s business income in 1998 reflected strong growth in businesses across North
America. International business results declined during 1998, reflecting economic conditions, including weakened
currencies, in Asia Pacific and Latin America. Net income of $2.812 billion in 1998 and $2.697 billion in 1997,
included restructuring charges of $706 million ($446 million after-tax) and $580 million ($351 million after-tax),
respectively. Business income in 1997 of $3.048 billion was up $65 million from 1996. 1998 restructuring initiatives
were designed to realize synergies and operating efficiencies including regional consolidation of call centers and
other back office functions worldwide, reduction of management layers, sales force restructuring and integration of
overlapping marketing and product management groups. The business improvements and integration initiatives
announced in 1998 were projected to yield expense savings of approximately $380 million pretax in 1999, and to
reach a run rate of approximately $540 million in annual pretax savings beginning in 2000. In 1999, these actions,
together with tighter management of non-customer expenses were expected to yield gross annual pretax expense
savings of approximately $800 million.
Consumer’s core income growth in 1998 was led by Banking, Lending and Insurance businesses in North America,
up 40% to $1.289 billion and 15% to $1.215 billion, respectively, partially offset by a 12% decrease in International
due to global economic conditions. Global Consumer core income was also reduced by spending on global
advertising, marketing, and distribution development initiatives, and spending on the technological enhancements
of e-Citi. Revenues in Global Consumer in 1998 increased $3.2 billion or 14% to $25.9 billion, led primarily by
83
Cards, up $1.7 billion or 31%, including the $1.1 billion impact of the Universal Card Services (UCS) acquisition.
Also contributing to Global Consumer growth were the Insurance businesses, up $858 million or 11% and Consumer
Finance Services up $271 million or 25%. Revenues in Global Consumer in 1997 increased $1.8 billion or 9% to
$22.7 billion, led by a $1.1 billion or 17% increase in Insurance and a $657 million or 8% increase in
Banking/Lending. Through e-Citi, Global Consumer focuses on the development of electronic banking initiatives,
including Internet-based transactional banking products. These initiatives help place customers’ entire financial
relationships at their fingertips.
Commissions and fees revenues of $11.6 billion were up $653 million or 6%, led by growth in Cards, including
UCS, and were up $830 million or 8% in 1997, also led by growth in Cards. Insurance premiums of $9.9 billion in
1998 were up $855 million or 10% and were up $1.362 billion or 18% in 1997 reflecting solid growth in all sectors.
Asset management and administration fees of $2.3 billion were up $577 million or 34% in 1998 and up $325 million
or 23% in 1997 as a result of continued growth in assets under management.
Expenses increased in Global Consumer by 16% in 1998 and 10% in 1997, reflecting UCS (in 1998), global
advertising, marketing, and distribution initiatives, and electronic banking development efforts. Global Corporate
and Investment Bank expenses were up 2% in 1998 and 8% in 1997, primarily attributable to increased spending on
technology, volume-related increases, and costs associated with implementing plans to gain market share in selected
emerging market countries.
Global Consumer managed net credit losses in 1998 were $4.4 billion and the related loss ratio was 2.70%,
compared with $3.8 billion and 2.61% in 1997 and $3.4 billion and 2.41% in 1996. The increases in the 1998 net
credit losses primarily reflected the UCS acquisition. The managed consumer loan delinquency ratio (90 days or
more past due) was 2.12%, a decrease from 2.23% and 2.54% at the end of 1997 and 1996, respectively.
By Business Segment
Citibanking North America delivers banking services to customers through Citibank’s branch network and
electronic delivery systems in North America. In 1998 it reported business income of $113 million, up $42 million
or 59% from 1997 which was up from a loss of $12 million in 1996. This principally reflected higher revenues.
Average customer deposits were $39.6 billion in 1998, up from $37.1 billion in 1997 and $34.9 billion in 1996.
Adjusted operating expenses in 1998 were up $94 million or 6% from 1997 and grew $104 million or 7% in 1997
due to volume growth. Credit costs improved to $111 million in 1998 from $131 million in 1997 and $140 million
in 1996. The net credit loss ratio was 1.49% in 1998, down from 1.61% in 1997 and 1.72% in 1996. Business
income in 1998 and 1997 benefited from a lower effective tax rate.
Cross-selling programs and pilots currently underway include the offering of credit cards, mortgages, investment
products, and life insurance to Citibanking customers, as well as the offering of Citibanking products to customers
of Primerica and Consumer Finance Services. Citibanking has launched new training, licensing and compensation
programs to enable and motivate current bankers to sell the full range of financial services products that meet
clients’ needs.
Cards plans to meet customers broader financial and insurance needs through cross-selling opportunities that
should provide the fuel for continued portfolio growth. Credit costs and delinquencies may increase from 1998
levels as a result of continued portfolio growth. In 1998, Citibank acquired Universal Card Services from AT&T for
$3.5 billion in cash. In addition, Citicorp entered into a ten-year co-branding and joint marketing agreement with
AT&T. As of 12/31/98, UCS added $16.9 billion in managed customer receivables and 14 million accounts to
Cards. In 1998, UCS contributed $1.082 billion to revenues, $693 million to expenses, and $500 million to credit
costs, resulting in a net loss of approximately $72 million. These amounts included $320 million (pretax) of UCS
acquisition premium costs (including funding costs associated with purchase premium). U.S. bankcards (including
Travelers Bank), Diners Club, and private label cards reported business income of $737 million, up $214 million or
41% from 1997 reflecting significant improvements in the U.S. bankcards business. Net income of $698 million in
1998 and $487 million in 1997, included restructuring charges of $58 million and $59 million. Business income of
$523 million in 1997 was down from $713 million in 1996, reflecting higher credit costs in U.S. bankcards.
Adjusted revenues of $7.108 billion increased $1.678 billion or 31% from 1997, reflecting UCS acquisition, and in
other U.S. bankcards portfolios increased delinquency charges due to pricing actions and higher interchange fee
revenue. Revenues in 1997 increased $190 million, principally in U.S. bankcards reflecting business volume growth
84
and increased delinquency charges. On a managed basis, the U.S. bankcard portfolio experienced strong growth in
1998 reflecting the acquisition of UCS and the impact of enhanced target marketing efforts. Adjusted operating
expenses of $2.692 billion were up $860 million or 47%. Expenses in 1997 increased $95 million or 5% from 1996,
principally in U.S. bankcards, reflecting costs associated with risk management initiatives and increased marketing
efforts. Adjusted credit costs in 1998 were $3.253 billion, up from $2.808 billion in 1997 and $2.407 billion in 1996.
Managed net credit losses in U.S. bankcards were $3.123 billion, or 5.33% of average managed loans (excluding
UCS, $2.623 billion or 5.53% of average managed loans) compared to $2.662 billion or 5.74% in 1997 and $2.169
billion or 4.95% in 1996. The decline in the net credit loss ratio in 1998 reflects moderating industry-wide
bankruptcy trends.
Traveler’s Life and Annuity consists of annuity, life and long-term care products marketed by Travelers. In 1998,
its products were introduced into Primerica and Citibank distribution. It also provides group products. Business
income was $496 million in 1998 compared to $424 million in 1997 and $360 million in 1996. The 17%
improvement in 1998 reflects growth in annuity balances; life and long term care premiums; and an increase in net
investment income. The18% improvement in 1997 was driven by investment income and double-digit growth in
individual and group annuity balances and long-term care insurance premiums. The successful cross-selling
initiative of Travelers Life and Annuity products through the Primerica, Citibank, Copeland, and Salomon Smith
Barney Financial Consultants distribution channels, along with improved sales through the independent agent
network, reflects the continuing effort to build market share by strengthening relationships in key distribution
channels. Deferred annuities sales drove account balances up 23% from $16.1 billion at year-end 1997 and from
$13.2 billion at year-end 1996. Net written premiums and deposits increased 35% in 1998 to $3.43 billion from
$2.55 billion in 1997 and $1.99 billion in 1996 reflecting marketing initiatives at Salomon Smith Barney and
penetration of small company 401(k) market plus a new product introduction in the Primerica channel. Direct
periodic premiums and deposits for individual life insurance of $322 million in 1998 were 11% ahead of 1997 and
12.7% over 1996. Life insurance in force was $55.4 billion at 12/31/98, up from $51.6 billion for 1997 and $50.4
billion for 1996. Net written premiums for the growing long-term care insurance line reached $213 million in 1998
compared to $184 million in 1997 and $128 million in 1996.
Primerica is an active part of CG’s consumer financial services in North America. It markets life insurance
products, including annuities and mutual funds developed by Salomon Smith Barney and others, mortgages and
personal loans of CCC, automobile and homeowners insurance of Travelers Property Casualty Corp. and Citibank’s
personal checking and other accounts. The Primerica sales force is composed of approximately 150,000 independent
sales representatives. Business income was $400 million in 1998 compared to $335 million in 1997 and $273
million in 1996. The 19% improvement in 1998 reflects continued success at cross-selling a range of products,
growth in life insurance in force, favorable mortality experience and expense management. The 23% increase in
1997 results also reflects strong sales of mutual funds and variable annuities, continued growth in life insurance,
favorable mortality experience and expense management. Substantial increases in production and cross-selling
initiatives were achieved during 1998 as Primerica benefited from application of the Financial Needs Analysis
(FNA), the diagnostic tool that enhances the ability of the Personal Financial Analysts to address client needs. More
than 535,000 FNAs were submitted during 1998, an 18% increase over the 454,000 submitted in 1997. Earned
premiums net of reinsurance were $1.057 billion, $1.035 billion, and $1.030 billion in 1998, 1997, and 1996,
including $987 million, $967 million, and $954 million for Primerica individual term life policies. Total face amount
of issued term life insurance was $57.4 billion in 1998 compared to $52.6 billion in 1997 and $52.0 billion in 1996.
The number of policies issued was 223,600 in 1998, compared to 228,900 in 1997 and 247,600 in 1996. The average
face value (in thousands) per policy issued was $223 in 1998 compared to $200 in 1997 and $185 in 1996. Life
insurance in force at year-end 1998 reached $383.7 billion, up from $369.9 billion at year-end 1997 and $359.9
billion at year-end 1996, and continued to reflect good policy persistency.
Over the last several years, Primerica has focused upon strategic expansion beyond life insurance and now offers a
greater variety of financial products and services through its sales force. Primerica has traditionally offered mutual
funds to customers as a means to invest the relative savings realized through the purchase of term life insurance as
compared to traditional whole life insurance. Sales of mutual funds were $2.942 billion in 1998 compared to $2.689
billion in 1997 and $2.327 billion in 1996. During 1998, Salomon Smith Barney funds accounted for 60% of
Primerica’s U.S. sales and 50% of Primerica’s total sales. Variable annuities also showed momentum with net
written premiums and deposits of $652 million in 1998 up from $347 million in 1997.
85
Through Travelers, Global Consumer also writes all types of property and casualty insurance covering personal
risks, and based on A.M. Best Company data for 1997 direct written premiums, it is the second largest writer of
personal lines of insurance through independent agents in the U.S. The Personal Lines unit of TAP had
approximately 5.1 million policies in force at 12/31/98. These are automobile and homeowners insurance sold to
individuals that are distributed through approximately 5,000 independent agencies located throughout the United
States. Personal Lines also uses other distribution channels, including sponsoring organizations such as employee
and affinity groups, joint marketing arrangements with other insurers and the Primerica sales force. Personal Lines
net written premiums for 1998 were $3.490 billion compared to $3.074 billion in 1997 and $2.359 billion in 1996.
Business income was $319 million in 1998 compared to $300 million in 1997 and $193 million in 1996. The 1998
increase was primarily due to higher investment income and increased production. The 1997 increase reflected
inclusion in 1997 of Aetna P&C for the entire year compared to only nine months in 1996. Travelers purchased
Aetna Casualty and Surety Company and Standard Fire Insurance Company (Aetna P&C) on 4/2/96 for
approximately $4.2 billion in cash.
Mortgage Banking provides mortgages and student loans to customers across North America. It reported business
income of $175 million in 1998, up $58 million from 1997 due to increased business volume. Net income was $169
million in 1998 and $105 million in 1997 up from $64 million in 1996. Mortgage Banking accounts, loans, and
originations all grew in 1998 and 1997. Revenues, net of interest expense, of $558 million in 1998 was $39 million
or 8% over 1997 and in 1997 they were up $61 million or 13% from 1996, reflecting increased mortgage
originations and growth in student loans. Adjusted operating expenses were up $9 million or 4% in 1998 and $15
million or 7% in 1997, reflecting additional volume. Credit costs of $20 million in 1998 declined from $87
million in 1997 and $134 million in 1996. The 1998 net credit loss ratio of 0.31%, was down from 0.51% and
0.64% in 1997 and 1996, respectively, reflecting continued improvement in the mortgage portfolio.
Consumer Finance Services includes consumer lending operations such as secured and unsecured personal loans,
real estate-secured loans and consumer goods financing of the Commercial Credit Company, plus related credit
insurance services provided through subsidiaries. The credit card operations of Commercial Credit Company are
included in Cards. Business income was $264 million in 1998 compared to $213 million in 1997 and $199 million in
1996. The 24% increase in 1998 reflects internal receivables’ growth in all major products, an improved charge-off
rate, and integration of Security Pacific Financial Services. The 7% increase in 1997 also reflects strong receivables’
growth. Net receivables at 12/31/98 reached a record $11.9 billion compared to $9.8 billion at year-end 1997 and
$7.1 billion at year-end 1996. The 7/31/97 Security Pacific acquisition contributed approximately $1.2 billion in
receivables’ growth. Internal sources grew receivables 21% over year-end 1996 levels. Internal growth in 1998 and
1997 was led by the Primerica generated portfolio, which grew 31% to $2.95 billion in 1998 and 49% to $2.26
billion in 1997. The net credit loss ratio of 2.74% in 1998 was down from 2.82% in 1997 and 3.14% in 1996. As
12/31/98, CCC had 980 branches, making it one of the largest domestic branch networks in the consumer finance
industry.
The International unit of Global Consumer provides full-service banking and lending, including credit and charge
cards, in Europe, Middle East and Africa, Asia Pacific and Latin America.
Asia Pacific provides banking and lending services, including credit cards, to customers throughout the region. It
reported business income of $410 million in 1998, down from $428 million and $496 million in 1997 and 1996,
reflecting regional economic conditions. Foreign currency translation reduced business income by approximately
$127 million in 1998 and $34 million in 1997. The effect of foreign currency translation moderated during the
second half of 1998. Net income of $346 million in 1998 and $368 million in 1997 included restructuring charges of
$83 million and $97 million respectively. Asia Pacific accounts grew 19% and 13% in 1998 and 1997, principally
reflecting growth in customer deposits due to a “flight-to-quality”, particularly in Japan. Customer deposits grew
18% and 8% in 1998 and 1997. Credit costs include a provision in excess of net credit losses of $24 million, $30
million, and $8 million in 1998, 1997, and 1996. However, the business is well positioned in 1999 for continued
franchise growth.
The Europe, Middle East, & Africa (EMEA) consumer group provides banking and lending services, including
credit cards, to customers throughout its region. Revenues, net of interest expense, of $1.954 billion in 1998 grew
$90 million or 5% from 1997 reflecting growth across all countries except India and Pakistan where revenues
declined as a result of economic conditions. Credit costs in 1998 were $292 million, compared to $274 million in
1997 and $303 million in 1996. The net credit loss ratio was 1.71% in 1998, compared to 1.77% in 1997 and 1.68%
86
in 1996. It reported business income of $155 million in 1998, up $17 million from 1997. Net income was $30
million in 1998 and $73 million in 1997, including restructuring charges of $239 million and $112 million. Business
income of $138 million in 1997 was down from $190 million in 1996. EMEA reported 7% account growth in 1998
primarily reflecting loan growth, including credit cards. In 1997 accounts grew 3%.
The Latin American Consumer Bank provides banking and lending services to nearly five million customers with
credit and charge cards commanding a leading share position in four countries. Revenues, net of interest expense, of
$1.562 billion were up $116 million or 8% from 1997 reflecting account and business growth. Adjusted operating
expenses in 1998 grew $148 million or 16% from 1997 reflecting acquisitions, spending on new strategic alliances,
and increased collection efforts. Expenses in 1997 increased $133 million or 17% from 1996 reflecting account
growth, business expansion efforts, and spending on technology initiatives. Credit costs were $265 million in 1998,
up from $192 million in both 1997 and 1996 reflecting economic conditions and loan growth. The net credit loss
ratio was 3.07% in 1998, compared to 2.66% in 1997 and 3.44% in 1996. Reported 1998 business income was $163
million down from $273 million and $281 million in 1997 and 1996, primarily reflecting lower earnings in
Credicard, a Brazilian Card affiliate. The region experienced strong business volume growth in 1998 and 1997 with
deposit growth reflecting a “flight-to-quality” during 1998.
Asset Management is available through three primary platforms. The Salomon Brothers, Smith Barney, and
Citibank Global Asset Management companies offer institutional, high net worth and retail clients a range of
investment disciplines from global investment centers worldwide. Cross-selling efforts throughout the organization
resulted in $10 billion of long-term mutual fund sales, up 67% from 1997. Business income of $273 million in 1998
was up $30 million or 12% from 1997. Revenues, net of interest expense, rose 18% to $1,244 million in 1998
compared to $1,052 million in 1997 and $880 million in 1996. This increase is predominantly advisory fees and
reflects the growth in assets under management. Adjusted expenses were $820 million in 1998 compared to $685
million in 1997 and $574 million in 1996, reflecting strengthening of its research and quantitative analysis
investment teams, investment in marketing and wholesaler support, incremental technology spending, and the
acquisition of JP Morgan’s Australian asset management business.
Global Private Bank serves the market for private banking services that is attractive because the “wealth” segment
is growing faster than the overall consumer banking market. Although financial crises in a number of emerging
market countries have had an adverse impact, several regions, particularly the U.S. and Europe, remain strong and
prospects overall are positive long term. While competition for this segment is increasing, the global market is
fragmented with no dominant competitors. This presents the Private Bank with a good business opportunity
because it is one of a few that can offer globally a full range of services. It provides personalized wealth
management services for high net worth clients through 97 offices in 31 countries, generating fee income from
investment funds management, trust & fiduciary services, and custody services. Its Relationship Managers use their
knowledge about their clients’ individual needs and goals to bring them an array of personal banking services. It
reported business income in 1998 of $254 million, down $27 million from 1997, primarily reflecting lower earnings
in Asia Pacific. Net income of $211 million in 1998 and $263 million in 1997, included restructuring charges of $70
million and $28 million. 1997 business income of $281 million was up from $231 million in 1996, reflecting
revenue growth across all regions. Client business under management were $116 billion at the end of the year, up
from $101 billion in 1997 and $96 billion in 1996, reflecting growth in all regions except Asia Pacific. Adjusted
revenues in 1998 were $1 billion, up $43 million from 1997, reflecting growth in client-related foreign exchange and
other fee revenues. Revenues for 1997 were $1 billion, up $890 million from 1996, reflecting growth in fees from
new investment products introduced during the year and client-related foreign exchange. Adjusted operating
expenses of $725 million in 1998 were up $55 million or 8% from 1997 due to an increased sales force and higher
product management costs. Expenses of $670 million in 1997 were up $33 million from 1996 reflecting additional
staff needed to support more business as well as increased spending on technology. 1997 credit benefits improved
from 1996, as the U.S. business continued to gain on OREO sales, recoveries, and income on cash-basis loans.
Other Consumer includes certain treasury operations, global marketing and other programs. It reported a net loss of
$86 million in 1998, compared to net income of $24 million and $46 million in 1997 and 1996, reflecting higher
spending on global advertising, marketing, and distribution development initiatives.
CONSUMER PORTFOLIO CREDITAND RISK MANAGEMENT
87
Managed loans of $181.6 billion as of 12/31/98 were up from $149.8 billion and $145.4 billion for1997 and 1996.
The increase from 1997 reflects the acquisition of UCS plus worldwide portfolio growth. In North America,
Mortgage Banking and Citibanking credit trends improved from both 1997 and 1996. Mortgage Banking loans
delinquent 90 days or more of $625 million at 12/31/98 declined from $715 million for 1997 and $903 million for
1996. Citibanking North America delinquencies of $87 million declined from $142 million and $231 million,
respectively. Similarly, Mortgage Banking net credit losses of $75 million in 1998 declined from $115 million in
1997 and $133 million in 1996. Citibanking North America net credit losses of $124 million declined from $135
million and $147 million, respectively.
U.S. bankcards managed loans delinquent 90 days or more were $1.0 billion or 1.45% on 12/31/98, compared with
$868 million or 1.77% for 1997 and $897 million or 1.89% for 1996. Net credit losses in 1998 were $3.1 billion and
the related loss ratio was 5.33%, compared with $2.7 billion and 5.74% in 1997 and $2.2 billion and 4.95% in 1996.
The improvement in 1998 from 1997 in both the delinquency and net credit loss ratios reflects moderating industrywide bankruptcy trends and previously implemented credit risk management initiatives. Citi writes off bankrupt
accounts upon notice of filing of bankruptcy.
Consumer Finance Services loans delinquent 90 days or more of $172 million and the related ratio of 1.44% at
12/31/98 increased from $133 million or 1.36% at the end of 1997 and $94 million or 1.33% at 12/31/96. Net credit
losses in 1998 were $291 million and the related loss ratio was 2.74%, compared with $233 million and 2.82% in
1997 and $209 million and 3.14% in 1996. The increase in both dollar delinquencies and net credit losses principally
reflects loan growth. In Europe, Middle East, & Africa, credit trends have been stable or improving in most
countries. Loans delinquent 90 days or more were $937 million with a related ratio of 5.49% at 12/31/98, compared
with $905 million or 6.00% for 1997 and $959 million or 5.91% for 1996. Net credit losses in 1998 were $270
million and the related loss ratio was 1.71%, compared with $267 million and 1.77% in 1997 and $291 million and
1.68% in 1996. In Asia Pacific and Latin America, in 1998 delinquencies and net credit losses increased from both
1997 and 1996 due to economic conditions. Asia Pacific loans delinquent 90 days or more of $498 million at
12/31/98 increased from $259 million for 1997 and $256 million for 1996. Net credit losses of $227 million in 1998
increased from $171 million in 1997 and $159 million in 1996. Foreign currency translation reduced net credit
losses in Asia Pacific by approximately $70 million and $26 million in 1998 and 1997, respectively. Latin America
loans delinquent 90 days or more of $288 million at 12/31/98 increased from $173 million at 12/31/97 and $124
million at 12/31/96. Net credit losses of $239 million in 1998 increased from $175 million in 1997 and $185 million
in 1996. Global Private Bank loans delinquent 90 days or more were $193 million at 12/31/98, compared with $110
million at 12/31/97 and $193 million at 12/31/96. The increase in delinquencies from 1997 reflects an increase in
Asia Pacific and Europe, the Middle East and Africa, partially offset by improvements in North America. Net credit
losses in 1998 were $5 million, compared with net recoveries of $13 million in 1997 and net credit losses of $4
million in 1996. The increase in net credit losses from 1997 also reflects higher write-offs in Asia Pacific and Latin
America with some offset in North America.
Total consumer loans on the balance sheet delinquent 90 days or more on which interest continued to be accrued
were $1.1 billion at 12/31/98 and $1.0 billion for both 1997 and 1996. Included in these amounts are U.S.
government-guaranteed student loans of $267 million at 12/31/98, up from $240 million and $239 million for 1997
and 1996, reflecting growth in the portfolio. Other consumer loans delinquent 90 days or more on which interest
continued to be accrued (which include worldwide bankcard receivables) were $790 million, $762 million, and $770
million, respectively. The majority of these other loans are written off upon reaching a stipulated number of days
past due. Citigroup’s policy for suspending the accrual of interest on consumer loans varies depending on the terms,
security, and credit loss experience characteristics of each product, as well as write-off criteria in place. At 12/31/98,
interest accrual had been suspended on $2.3 billion of consumer loans, primarily consisting of mortgage,
installment, revolving, and Private Banking loans, compared with $2.0 billion at 12/31/97 and $2.3 billion at
12/31/96. Increase from 1997 reflects rise in Asia Pacific, Latin America, and Global Private Bank with some offset
from Mortgage Banking.
88
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